Agency PAYE:
This is not the most tax efficient option when compared to either a Private Limited Company or Managed Service Company (Umbrella). Moving from this trading style for the vast majority of contractors they will see significant savings. If you do use your Agency on a PAYE basis then the Agency will be responsible for all your invoicing and payroll.
Private Limited Company:
When using a Private Limited Company you will receive your earnings gross (i.e. including tax and NI) and it is your company’s responsibility for you to deduct and pay the necessary taxes and remember the “deemed salary” requirement. If you are caught by IR35 rules, your income will be in the form of a “deemed salary” after deductions for expenses and National Insurance.
Assuming you will reach the highest rate (40%) tax band with your combined income from the company, you will have to fill out a self assessment form for income received in each tax year. The Inland Revenue use the details on this form to calculate whether you need to pay any additional tax. Any tax owed is payable by the 31st January of the following year. The tax year goes from the 6th April to the 5th April of the following year.
If you are running your own Private limited Company then the Inland Revenue have also introduced “payments on account” which you should be aware of. If you owe say £4,000 in tax for the previous year, you will also have to pay the same amount again (in advance) - i.e. £4,000 + £2,000 in January, then the remaining £2,000 in June. Again this is a potential downside of choosing this trading style.
Managed Service Company (Umbrella):
This is fast becoming a popular choice of trading style for many contractors as it removes all the hassles, associated costs and burdens of running your own company. They take all the administrative burden of the above tasks by processing all your invoices, payroll, expenses, producing your year-end financial statement to the Inland Revenue and your annual self-assessment. (Or you can keep control and responsibility for the self-assessment process if you wish.) More and more contractors are opting for this route as the legal responsibility for these issues rest not with you but the Managed Service Company (Umbrella).
When using either a Managed Service Company (Umbrella) or an Agency on a PAYE basis then they will deduct the required amount from your salary before paying you. So you do not need to worry about it.
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