As a contractor, it is imperative to choose a company you wish to operate. The type of Contractor Company is directly proportional to the operation of IR35. To set up as a contractor, you are offered three options mentioned below:
- Limited company
- Umbrella Company
- PAYE through the Agency
It is a historical fact that we are not at all ignorant of the concept of Limited companies, also known as the Personal Service Company (PSC) being used by a large number of IT contractors. Limited companies are highly feasible options when it comes to taxes. The only stoppage is the introduction of IR35. The tax benefits are altered with the operation of new IR35 rules.
If you don’t fall in the IR35 category, you can enjoy the tax benefits offered by Limited companies, but if the situation is the opposite, it is better to switch to the umbrella company.
Setting up a limited company is not at all a tough task. You can fill up an online application and get your brand ready to trade in no time. The other option is to apply to the company house directly, but the process is quite cumbersome.
A contractor can make the best use of the Umbrella Company’s ready made invoicing feature. In the form of a PSC, you can also get rid of extra administrative duties. The company is adorned with the ability to issue invoices on the contractor’s behalf, collect payments from agencies/clients, calculate taxes, and make N.I contributions. An umbrella company also gives the contractor the net pay direct to their bank account.
Earlier, Umbrella Company was an inexpensive option, but due to the introduction of IR35, the tax flaws have come to massive decline making Umbrella companies a feasible option. There are no extra charges levied for the administration overheads, and no tax benefit is deducted, which has lead to a new breed of internet-based umbrella companies.
PAYE through the agency
There are many agencies in the UK offering their payroll service to convert to PAYE. PAYE offers minimum tax benefits as the contractor is liable to pay all the taxes along with national insurance (NI) on your income. The other flaw with PAYE is the contractors’ inability to claim any valid business expenses which could suffice in getting rid of tax and NI liabilities.
If you are a contractor and still have confusion regarding Limited Company or Umbrella Company or PAYE, Please drop an email at firstname.lastname@example.org