Getting paid
With finding a new contract and fulfilling the one you currently have to worry about, the last thing any contractor needs is trouble getting paid, paying the right amount of tax or filing the necessary paperwork with HMRC. Yet with day rates all is not as simple as it seems.
At first glance a day rate of £300 vs an equivalent employed day rate of £200 looks attractive because a £100 a day rate hike represents a 50% pay increase. But the truth is that as an employee there’s a host of benefits in addition to you £200 that actually make being an employee more attractive than it looks on paper; not to mention some nasty tax shocks in store that will reduce the take home of anyone that’s self-employed.
For example, as an employee on £200 per day, you will be paid £52,200 for a full years employment (in 2019 that’s 261 working days) where as a contractor on £300 a day will on average bill £69,000 per year (as they will take around 30 days holiday). Immediately then, we can see that what appears to be a 50% increase in daily rate, is actually only 30%.
Additionally contractors have costs that they often can’t claim back form their end client or agency. These costs can be significant, for example travel expenses including overnight stays, computer equipment, insurance or the costs of administering your own business.
One of the most significant administration costs for contractors is Employers National Insurance payments. As an employee, these will have been paid over and above your salary at a rate of 13.8% by your employer. ENI is a considerable tax on employees that most people forget about entirely, yet as a contractor the liability for this tax falls on the contractor to pay out of their £300 per day.
In fact, taking into account the threshold for ENI, the average contractor billing £69,000 will actually pay £7,300 in ENI contributions.That £7,300 can’t be claimed back from the client or agency so it need to be deducted from the contractors billed amount. This means that after ENI, the contractor will only be able to pay themselves around £61,700 per annum. As a result, the initial 50% contractor premium is actually closer to 18%.
Yet an 18% pay rise shouldn’t be scoffed at. An 18% pay rise for anyone is substantial and for most people considering contracting it’s enough to make them jump head first into the world of self-employment.
For contractors looking to invoice for the first time and pay their taxes on time, two predominant options exist to help contractors with their invoicing and payroll.
a. Working through an Umbrella Company – an employer who invoices on your behalf and pays your taxes for you.
Umbrella Companies in the UK are specialist employers that exist to employ contractors. They have central payroll and invoicing departments that deal with your agency or end client, collect any money owed to you and process your payments through PAYE in turn paying your taxes to HMRC.
Aside from submitting a timesheet to your Umbrella or your agency, the most work you will need to do to get paid is to wait for the money to arrive in your bank and a payslip via email.
They are often the option of choice for first time contractors that are unsure about their contracting future and need a hassle free way to contract.
As your employer, you’ll sign a contract with your Umbrella and they will provide you with the basic insurances you require to work on a client’s site. In return the Umbrella Company will take a fee each week or month. Fees can range from £15-£30 per week depending upon the services offered.
Of course not all Umbrellas were created equal. It’s therefore important when choosing an Umbrella Company that the fee you pay isn’t the only thing you look at.
In fact some Umbrellasoffer better returns than others simply because the cheapest UK Umbrella Companies won’t take into consideration your eligibility for childcare contributions, the marriage allowance or other common employee benefits.
For example, an Umbrella Company that allows you to claim childcare vouchers, will on average leave someone earning £150 per day up to £57 per week better off.
In addition, some Umbrella Companies will offer you employee benefits like store discounts that if used well can save you hundreds of pounds per year and far outweigh the increased fee you’re paying to the Umbrella.
It might not seem like much but an Umbrella Company that offers employee benefits such as a 5% M&S discount, could leave you £20 a month better off. Combine this discount with childcare credits, and an Umbrella Company that costs you £10 more per week could actually leave a contractor on £150 per day £208 a month better off.
b. Working through a Limited Company – working in conjunction with an experienced accountant to operate your own company, raise invoices, file paperwork and organise your own tax payments.
Contractor Limited Companies, or Personal Service Companies, are vehicles through which a contractor can invoice for their time and process their payroll on their own.
Unlike with Umbrella Companies, the contractor is the only person working through their Limited Company and as such a single payroll needs to be run each time the contractor wishes to get paid.
Additionally the contractor, who is usually the single shareholderand director, is required to file company accounts and returns annually. Because this can often be complex, a contractor usually partners with an accountant who can take some of the administration burden off the shoulders of the contractor.
Utilising a Limited Company can in some circumstances enable a contractor to reduce their salary to a minimum and pay themselves through dividends (company profits) that don’t attract the same level of income or national insurance tax as they would if paid as a salary. Using this model helps these contractors to increase their net take home.
In general Limited Companies are considered to be more hassle than an Umbrella Company but can be more financially rewarding.
Historically anyone earning over £200 per day would have found a Limited Company to be more financially beneficial than an Umbrella Company, however in recent years the UK Government has clamped down on the “tax avoidance” practices of Contractor Limited Companies making them less attractive.
