Contract Work Pay (PAYE/Umbrella/PLC)

A question about : Contract Work Pay (PAYE/Umbrella/PLC)

Hi all,

I'm soon going to be making the jump from working as a permanent Health IT professional to the scary world of contracting.

Now, at the moment, I'm just going to be working and paying tax using PAYE. However, I've also been told the other options (which may be better) are to set myself up as a company, or work with/under an umbrella company.

Can anyone please explain to me like I'm a complete moron what these options are/how they work/the pros and cons of either?

Also, from the PLC perspective, where on the spectrum of Illegal to Good Gamesmanship does it sit?

Thanks in advance,

C

Best answers:

• You have two options:
  Umbrella
  Ltd
  A normal umbrella you are PAYE of the umbrella company. There are some dubious ones that use loans, investment or offshore techniques to reduce your tax liabilities etc but even with these the majority still have you as employee on NMW and the rest of the money comes from dodgy routes.
  Ltd, not PLC, is the other option - both are incorporated bodies but one is privately traded shares and is typically small-medium companies where as Plcs have publicly listed shared on FTSE etc and will always be of a larger size because of the legal requirements to become Plc
  Ltd is perfectly legal, there is however a risk that you may be considered "inside IR35". This doesnt make anything illegal but sets rules about what percentage of the profits must be taken by you as salary rather than being able to take things as dividends or having partners as part time staff etc. If you can be outside IR35 then you can pay less to HMRC.
• the key is to understand the difference in tax/benifit of the three options so you get the rate of pay right.
  The key ones are
  PAYE you get paid holidays and other benifits.
  Umbrella you pay the employer NI
  Ltd, the main savings are NI, the tax is the similar in most cases.
  in the above order you can offset more expenses.
  To go from PAYE to umbrella you need at least a 25% uplift in rates.
  If a long term thing then Ltd usually works out best and costs(acountant) about the same as umbrella(margin)
  If you are going to be working away from home then PAYE can be a problem unless you get the expenses paid seperately.