A New Contractor’s Guide to Getting Paid in 2019

A New Contractor’s Guide to Getting Paid in 2019

26 November 2018

Is your New Year’s Resolution to start working for yourself? You aren’t alone.

January is one of the busiest times for new company registrations as skilled workers target the money and freedom that can come with contracting.

But setting up isn’t easy. There are a lot of things to think about and if you plan your contracting journey properly now, you can save yourself several headaches down the way.

How to get paid

New contractors have two main payment options when they’re starting out.

The quickest and easiest way to get going is to use an umbrella company.

Umbrella company contracting

Umbrella companies make getting paid simple. When you sign up, you sign an employment contract and become legally an employee of the umbrella company. However, you can operate with the same freedom as if you worked for yourself

You send your timesheets to your agency and your umbrella company bill the agency on your behalf if necessary.

The umbrella company will then pay you as if you are a PAYE employee, taking care of your income tax and National Insurance obligations for you.

Using an umbrella company is fast, easy and flexible. It also means that you won’t be caught out by IR35, which we will come on to.

But contracting through an umbrella company is not the most tax-efficient way of getting paid. If you don’t mind a bit of extra administration and your goal is to maximise your income, then you may be better off setting up a limited company.

Limited company contracting

If you set up a limited company, you become a director and shareholder of the business.

It is more tax efficient, because you can pay yourself through a combination of salary and dividends.

Dividend income is taxed at a lower rate than salary income, which is one way that you can boost your take home pay. But in the last tax year, the tax-free dividend allowance was reduced from £5,000 to £2,000, reducing the net gains for limited company contractors.

Limited companies can be complicated to set up. You need to register with Companies House, register with HMRC and set up a business bank account.

As director, you’ll also be responsible for keeping good company records, filing accounts with HMRC and paying corporation tax.

Although you can boost your take home pay by contracting through a limited company, it is not the best option for everyone.

It is not very flexible and there are costs associated with closing down a limited company. So if you only plan on contracting for a short time, you may be better off choosing an umbrella arrangement.

Limited company contracts are also liable to be caught by IR35.

IR35

Off-payroll working rules (IR35) are designed to stop ‘disguised employment’. This is where a contractor works through a limited company but are, in HMRC’s eyes, actually an employee.

Limited company contractors that are ‘caught’ by IR35 rules will have to pay income tax and National Insurance Contributions as if they are an employee of the client they are working for.

How IR35 rules are applied is different in the public sector and the private sector. In the public sector, the client that engages the contractor is responsible for judging whether IR35 rules apply,  while in the private sector, the contractor judges their IR35 status.

This means that, for the moment, public sector contractors are more likely to be caught by IR35. From April 2020, however, the public sector IR35 rules are likely to be extended to the private sector.

Contractors setting up now may want to factor this into their decision making, because working through an umbrella company eliminates the IR35 headache.

Want advice on joining an umbrella company or setting up a limited company? Speak to a member of our team today. Call: 0800 121 6513.