There are generally three options – Agency payroll, Umbrella company and your own limited company (Personal Service Company).
Agency payroll – This is self-explanatory. You will pay tax and NI on a salary and you should receive holiday pay and statutory sick pay. It is simple for the contractor – and there are no tax breaks – but often, Agencies don’t want to run their own payrolls – so it might not be an available option.
Umbrella Company – you’ll be one of, maybe, hundreds of workers who are paid under PAYE by an Umbrella Company. They will invoice your end-client for you work; and, on receipt of the invoice money, pay you after deducting their fee plus any tax or National Insurance due. Traditionally, freelancers who are caught by the IR35 rule tended to use Umbrella Companies because of the minimal admin needed. Since April 2016, tax relief on home-to-site travel/subsistence expenses has been stopped (when the worker is directed, supervised or controlled by an end client) which means that Umbrella Companies are no more tax efficient than being on an Agency payroll – if one exists – but contractors have to pay a weekly or monthly fee to the Umbrella company for processing their pay.
Limited company – often referred to as a PSC. Freelancers who work through Limited Companies often use a specialist accountant (like AMS Accountancy) who will give a complete monthly reporting service, including advice for a monthly fee. Alternatively, they can deal with more of the business admin themselves, and then use an accountant to produce annual accounts; give tax planning advice; help with VAT and running a payroll (which AMS Accountancy also offer). A Freelancer working through a PSC will find this more tax efficient because:
- They can be paid in dividends which saves both employee’s and employer’s National Insurance;
- They can divide their income with a spouse/partner – and potentially save income tax
- They claim tax relief on business running costs as well as expenses related to particular contracts.
If a Freelancer fails IR35, they will lose tax relief on travel and subsistence expenses and on business running costs, and have to pay tax and National Insurance on the Company’s income as if it was taken as salary – currently it is for the contractor and their accountant to decide on this.
HOWEVER, from April 2019, the off-payroll working rules (IR35 in the private sector) means that large end-clients have to decide on the IR35 status of each contract (rather than the contractors), and many end-clients are refusing to deal with contractors who use their own PSC after April 2020.