1st Time Contractor Guide

1st Time Contractor Guide

For many who are new to contracting, all the new terms and industry jargon can get a little too much.  So we thought we'd put our heads together and come up with a nice and easy explanation of the basics for you.  So with the short guide below we'll soon have you knowing your umbrella company from your agency PAYE.

What is a Contractor?

'Contractor' is a term that we use when referring to individuals who work on a temporary or project basis for a client - generally being placed there by a recruitment agency. There are many names for contractors and depending what industry you work in you may hear them referred to as freelancers, consultants, interims, temps, temp workers or even locums. Nasa works with contractors across many industry sectors and as we don't have a minimum contract period - we can help even very short term contractors.

 
Agency PAYE

Some recruitment agencies allow you to work through their own in-house payroll system. The agency will be responsible for deducting full PAYE and NICs on all income. You also don't get the benefit of claiming expenses for tax relief so this is the least tax efficient way to contract. This method is only really suitable if you live very close to your place of work and have little in the way of expenses to claim for tax relief.

 
PAYE Umbrella Company

A PAYE umbrella company is an employment and payroll service designed specifically for contractors. Becoming an employee of an umbrella company brings you the main benefits of being a LTD Company but without the extra admin time associated. The main benefit is that you can offset some of the PAYE tax and National Insurance contributions by claiming tax relief on your expenses. These expenses help to reduce the tax and NIC you pay thus increasing what you get in your pocket.

 
Limited Company - PSC

A corporate structure which allows a single contractor to operate as a business in their own right. Often referred to as a Personal Service Company (PSC), a contractor would supply their services through the business. With the help of an accountant the contractor would submit payroll, VAT & Corporation Tax returns as well as company accounts each year. Expenses are also able to be claimed for tax relief, with a slightly broader scope than with an umbrella company. If able to operate outside of IR35, then this method is the most tax efficient, with contractors often seeing earnings retention 15% higher than with an umbrella company. Income is generally taken in the form of a low salary and dividends. A self assessment would need to be completed and the company would pay Corporation Tax (21%) on all profit less business costs.

 
What is IR35?

IR35 is the common name given to the Intermediaries Legislation that came into force in 2000. The legislation governs the contract world and those freelancers operating service companies, taking remuneration in the form of salary and dividend. It is concerned with whether or not a contractor would be deemed to be an employee of their client if their limited company or 'Intermediary' was not in the contract chain. It is important to point out that contractors who work through a PAYE Umbrella Company are 'Employed' so IR35 does not apply. If a contractor is deemed caught by IR35, then they must take all of their earnings as salary and pay full PAYE and NICs (less a 5% expense allowance). If a contractor fulfils certain criteria then they may work outside of IR35. In this instance the contractor can benefit from taking a low salary and the remainder of their earnings as dividend. This is a particularly tax efficient way in which to operate and you may save up to 15% of your income. If you are considering setting up a LTD company, then why not have a chat to us here at Nasa. We've specialised helping contractors with their own limited companies for many years, and offer competitive services from just £99 per month.

 
What is an MSC?

MSC refers to the Managed Service Company legislation (2007). This brought about the end of structures known as 'Composite Umbrellas' - a hybrid between LTD and Umbrella where contractors got paid with salary & dividend. Effectively, MSC limited the options available to contractors to those outlined above. It is important to check when selecting an umbrella company that they are; Based in the UK and not offshore (including Isle of Man) * Do not offer structures that involve loans or trusts * Deduct full PAYE and NICs after legitimate business expenses * Do not pay you with dividends, loans etc

 

 



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Stepping into contracting for the first time I will say how professional you act as a company. I would recommend anyone considering contracting to use you. Your advice is always excellent with a fast response to the most trivial of queries and payments are always on time.

Richard, Isle of Wight

I would like to take this opportunity to thank you and your colleagues for the service you have provided and for being patient with my inexperience of contracting. I shall be happy to recommend you to other contractors, and if I get another contract you will be hearing from me then.

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