If you are working in a temporary assignment you have three main payment structures open to you:
If you are working in a temporary assignment you have three main payment structures open to you: by PAYE (Pay As You Earn), via an Umbrella company (payroll services) or via your own Limited Company.
- PAYE: You are paid by a recruitment agency and pay the standard tax and National Insurance contributions. There are no administration or accounting issues involved and requires you to do nothing more than provide a timesheet to the agency each week for the hours you have worked. This is the usual payment method for short term (and often more junior) temporary workers.
- Umbrella Company: This allows you to gain some of the benefits of working through a limited company whilst not having to deal with the administrative burden of this set up. You submit your timesheet and any relevant expenses to the Umbrella company, leaving the issues of invoices, chasing payments, calculating tax/ NI contributions and making of payments to your own bank accounts to the Umbrella company to deal with. The Umbrella company will charge a fee to provide this service and fees can vary between different umbrella companies.
- Limited Company: You will need to set up your own Limited Company (this can be done at www.hmrc.gov.uk or www.gov.uk/browse/business/setting-up) and invoice the agency or client (if you are working directly) from your limited company. Once paid, you can pay yourself from your own limited company (normally through dividend payments which are tax beneficial). There are administrative duties that must be performed as with any limited company, e.g. year end accounts, insurance, corporate tax returns etc.
More senior and long term temporary workers tend to work through the latter two options – with most through their own limited company. There are other extremely important factors to ensure you understand before committing to this type of work, e.g. legislation/ tax issues that may apply to you.
The main one of these is IR35 which deems, to legally work as a limited company contractor, you should be an independent worker and not be under the control of the employer (i.e. not someone who could be working permanently in the same role but is simply under the guise of a contractor).
I you have any doubts as to whether this may apply to you, obtain legal advice – don’t get caught by the taxman! It is also highly recommended that anyone seeking to better understand which of these payment structures would be most beneficial/ relevant should take professional financial advice and not rely on this as financial guidance – it is for informative purposes only.