Choosing the correct payroll solution
Once you secure a contract, your recruitment agency will ask you to find a payroll solution to make sure you receive payment. Basically, there are 3 options:
- Umbrella company;
- Limited company;
- PAYE through the recruitment agency / end client.
There is no right or wrong option but the 'best' choice will depend on the contractor's circumstances such as the length of the contract, whether the contract is a stop gap or a long term arrangement, whether the contract is affected by IR35 and how little / much accountability the contractor would like over their tax & NIC.
An umbrella company is the easiest option to process your payroll as there are no issues surrounding IR35, tax liability, paperwork or hassle with the setting up / maintaining or with the dissolving of a Ltd company. An umbrella company will manage your tax affairs and remove the admin burden. The umbrella company should also provide you with professional insurances, a business manager to manage your account and an expenses policy to help contractors offset their expenses. The payroll is PAYE and is a straight forward process, which requires no involvement from the contractor.
If you decide to run your payroll through a limited company then you'll need to start forming your company as soon as you secure your first contract. Once your company is formed, this will ensure you can then raise invoices and set up your company bank account. Having chosen a company name you'll need to check that it is available. You will then be responsible for running and maintaining your own Ltd Company, whilst you carry out your contract by completing forms such as VAT returns, tax returns, & annual returns. You will need to find a reliable and trustworthy accountant to support you with these forms, whilst ensuring that you receive a regular payroll. You will also need to keep hold of all your receipts so that your accountant can help complete the relevant forms. Your accountant will be able to help you with your tax and NIC & IR35 status but it is yourself who is fundamentally responsible.
Processing your payroll directly through the recruitment agency / client is also an option but many recruitment agencies / clients prefer for this option to be avoided. The payroll is PAYE but unlike umbrella companies, there is no option to offset any business expenses against the tax and NIC and therefore the take home pay will not be as good as through an umbrella service / Ltd company. You will be required to submit a P45/P46 and you will receive a P60 at the end of the financial year.
Once you have made your choice, you will inform your recruitment agency, who will draw up the relevant contract. For hassle free contracting, request our free umbrella salary calculator.
To speak to one of our tax experts call 0800 434 6402.