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FAQ: Which Payment Structure should I choose?

There are 3 avenues which an IT Contractor can go down in order to establish a payment structure. The options are:

1) To set up their own Limited Company
2) To be directly employed on a PAYE basis with the client/agency
3) To use a PAYE Umbrella service

The most popular option amongst contractors, and that favoured by most clients and agencies, is the Ltd Company option. Any contractor who can work outside of IR35 will find the financial benefits of having their own Ltd Company far more appealing than any PAYE option. Although IR35 legislation is contentious and there are few, if any, airtight ways of achieving 100% IR35 efficiency, the potential to take home more money often outweighs the risks. However, for those contractors who fall within IR35, or for those who simply work on a short term basis and do not want the complications of their own company, the PAYE options are preferable.

Below is a list of the Pros and Cons of each option. These lists are not exhaustive but they do outline the most important points in relation to contractors:

Limited Companies:
Pros

  • The tax burden is less, so take home pay is greater. Directors are paid a taxable minimum wage and the rest in dividends, so the higher tax bracket is avoided.
  • Can claim certain business expenses to offset taxes, including some start up costs
  • Have full control of revenue – can control invoicing and payments
  • Looks good to own a company – Many clients and agencies expect this now

Cons

  • IR35 can catch many contractors out – it is essential to remain aware of the legislation
  • Costs of setting up the company, paying accountants to check paperwork and the insurance expense, all have to be met by the Limited Company
  • Responsibility and time allowances must be made for administrative tasks
  • No holiday entitlement – any days off are unpaid
  • The director is responsible for all compliance and is thus liable for any litigation

Direct PAYE
Pros

  • Holiday entitlement
  • No extra paperwork such as invoicing

Cons

  • Pay full tax and NI contributions
  • Doesn't allow you to claim valid business expenses which would help reduce NI and tax contributions

PAYE Umbrella
Pros

  • Quick alternative to setting up a Ltd company
  • Holiday entitlement
  • Offers an alternative to going directly on a client's payroll
  • Tax reducing expenses can be claimed

Cons

  • Pay full tax and NI contributions
  • Pay an admin fee for relatively limited gains

For further information, we have provided a short list of external links which provide further information on this topic. Net Consulting can not be held responsible for any content held on these sites.

Setting up a Ltd Company guide

General IR35 – Everything a contractor needs to know

Financial Impact of IR35

Various relevant contractor calculator tools

Advice on claimable expenses for contractors

 

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