Contracting - an idiot's guide?
Discussion
Okay not quite an idiot's guide - and this thread is maybe half jobs/employment, and half finance..
But the short of it is, I've been speaking with recruiters for a month or so, looking to move into a slightly different field / role (broadly construction / civils / consulting / quantity surveying etc.)
I've always worked PAYE, never self-employed or contracting or anything else, but I've been sent a role from an agent I'm working with that seems ideal, and the pay is very good, but it's contracting.
I was sent the job description and pay breakdown on Friday, so I've done some reading up over the weekend, although all they've really told me is that this would be an initial '6 month contract with an expected extension', so I'm waiting for an email or call today with more info if possible.
But I imagine there's many people on here that do / have contracted, so for a complete newbie, are there any pointers, basic details I need to confirm, first-timer pit falls etc?
This is the format of pay breakdown I was sent. Blanked the figures obviously, but for reference, the gross / net pay is a lot higher than my current annual salary and would put me into the 40% tax bracket, so that's where some concern comes in, because I'd probably want to use pension contributions or similar to avoid that..? (probably more a finance question, but maybe the format of the pay is useful here)
And based on my limited research / understanding, I'm assuming this role would be 'within IR35'..? Like I said I don't have any experience with contracting first-hand, but now I'm working with recruiters and the prospect is becoming more likely, I think I need to be up to speed in case that's the route I go down. Certainly the pay difference makes it seems very attractive, although I'm sure it's not so black and white..
But the short of it is, I've been speaking with recruiters for a month or so, looking to move into a slightly different field / role (broadly construction / civils / consulting / quantity surveying etc.)
I've always worked PAYE, never self-employed or contracting or anything else, but I've been sent a role from an agent I'm working with that seems ideal, and the pay is very good, but it's contracting.
I was sent the job description and pay breakdown on Friday, so I've done some reading up over the weekend, although all they've really told me is that this would be an initial '6 month contract with an expected extension', so I'm waiting for an email or call today with more info if possible.
But I imagine there's many people on here that do / have contracted, so for a complete newbie, are there any pointers, basic details I need to confirm, first-timer pit falls etc?
This is the format of pay breakdown I was sent. Blanked the figures obviously, but for reference, the gross / net pay is a lot higher than my current annual salary and would put me into the 40% tax bracket, so that's where some concern comes in, because I'd probably want to use pension contributions or similar to avoid that..? (probably more a finance question, but maybe the format of the pay is useful here)
And based on my limited research / understanding, I'm assuming this role would be 'within IR35'..? Like I said I don't have any experience with contracting first-hand, but now I'm working with recruiters and the prospect is becoming more likely, I think I need to be up to speed in case that's the route I go down. Certainly the pay difference makes it seems very attractive, although I'm sure it's not so black and white..
Edited by smithyithy on Monday 28th July 11:36
I cannot speak for your industry so it may be slightly different, but it sounds familiar.
I would 100% say you will be inside IR35 as the example shared is from an umbrella, so you will still be PAYE, your contract is with the umbrella not with the employer, they will take a cut at each pay day to process the PAYE payments.
You have the option to pay into a holiday pot so you get paid holidays in effect, but you're paying for them out of your salary, I don't know any contractors that opt for this and you should be able to opt out, OK so you won't get paid holidays but you've had the money and it could be earning you some interest.
With regards to pensions, they will likely enrol you into a pension after 13 weeks of employment, but you can opt out and pay into your own, yes you can use this to offset tax implications.
HTH
I would 100% say you will be inside IR35 as the example shared is from an umbrella, so you will still be PAYE, your contract is with the umbrella not with the employer, they will take a cut at each pay day to process the PAYE payments.
You have the option to pay into a holiday pot so you get paid holidays in effect, but you're paying for them out of your salary, I don't know any contractors that opt for this and you should be able to opt out, OK so you won't get paid holidays but you've had the money and it could be earning you some interest.
With regards to pensions, they will likely enrol you into a pension after 13 weeks of employment, but you can opt out and pay into your own, yes you can use this to offset tax implications.
HTH
First thing is to ascertain whether it’s in or outside of IR35.
If it’s inside then treat the hourly rate as salary. Basically that’s what it is.
If it’s outside then you can create a Ltd company. Pay yourself a basic salary of say £12k and take dividends whenever you feel like it and the company afford it. Your company will corp tax on gross profit. You will pay income tax on your dividends but not national insurance. You can write off a lot of things as expenses to lower the corp tax liability. Travel, expenses, IT, maybe a mobile phone, training, professional memberships etc etc. And, yes, pension contributions are the best way to reduce the corp tax liability.
If it’s inside then treat the hourly rate as salary. Basically that’s what it is.
If it’s outside then you can create a Ltd company. Pay yourself a basic salary of say £12k and take dividends whenever you feel like it and the company afford it. Your company will corp tax on gross profit. You will pay income tax on your dividends but not national insurance. You can write off a lot of things as expenses to lower the corp tax liability. Travel, expenses, IT, maybe a mobile phone, training, professional memberships etc etc. And, yes, pension contributions are the best way to reduce the corp tax liability.
So inside ir35 is normal done via an umbrella company. So you sign a contract with the umbrella company and they have the contract with the recruiter who has the contract with the end customer. In terms of getting paid nothing particularly different here from paye. More money yes and also no benefits, so you need to sort your own pension etc. it’s a much harder life as contracts come to an end more frequently and you need to play the political game. Can be great when the sun is shining and the labour market is good.
I looked in to something similar - Civ Engineering.
All good when there is work. However, when there is a downturn, a company will ditch all of their contractors, and then you have a s
tload of contractors all looking for work at the same time. So you really need a partner who can take up the load when you have no work, or you need a fat pot behind you for when the inevitable happens.
And it only made any sort of sense outside of IR35.
I didn't bother going for it, the risk:reward was too high.
All good when there is work. However, when there is a downturn, a company will ditch all of their contractors, and then you have a s
tload of contractors all looking for work at the same time. So you really need a partner who can take up the load when you have no work, or you need a fat pot behind you for when the inevitable happens. And it only made any sort of sense outside of IR35.
I didn't bother going for it, the risk:reward was too high.
Thanks for the replies so far. It did read like inside IR35 to me, I think that's a bit more reassuring as it seems like less of a leap from 'full time' compared to say, registering a LTD and all that jazz.
I get the points re. paying the middle man / umbrella, although in this case the cut seems relatively miniscule.
Then main consideration seems the risk, rewards, benefits..
What I will say, is the net pay for this example with their assumed deductions etc, is about 80% higher than my current take-home, so it's not an insignificant pay rise at all. If it was something like 10-20% but I'd be losing employee benefits and having the risk of not having work when the contract ends then I wouldn't consider it..
I get the points re. paying the middle man / umbrella, although in this case the cut seems relatively miniscule.
Then main consideration seems the risk, rewards, benefits..
What I will say, is the net pay for this example with their assumed deductions etc, is about 80% higher than my current take-home, so it's not an insignificant pay rise at all. If it was something like 10-20% but I'd be losing employee benefits and having the risk of not having work when the contract ends then I wouldn't consider it..
Don't forget you are also paying the 15% Employers NI on all the gross income as well.
The headline rate that you receive is very much gross. The umbrella will deduct ees and ers and then their fees, apprenticeship etc etc and subject the remainder to employee PAYE.
Seeing your payslip weekly or monthly is quite depressing sometimes !
The headline rate that you receive is very much gross. The umbrella will deduct ees and ers and then their fees, apprenticeship etc etc and subject the remainder to employee PAYE.
Seeing your payslip weekly or monthly is quite depressing sometimes !
I haven't done it for years, but in my day it was Paye, Umbrella or self employed
I always went umbrella as you got the pretax hourly plus back then you could add fuel etc so it was worthwhile
Towards the end, umbrella became useless unless you were earning big numbers so I stopped it, I did try ringing around once to get the best deal, but invariably you got less than they quoted, and then waffled their way out of it, to the point when in some cases I asked to be put on paye, self employed was the way, but I never had the balls, wish I had now.
But I am going back here to blokes saying, if you get 15ph I take 1 you keep the rest , no questions lol
I always went umbrella as you got the pretax hourly plus back then you could add fuel etc so it was worthwhile
Towards the end, umbrella became useless unless you were earning big numbers so I stopped it, I did try ringing around once to get the best deal, but invariably you got less than they quoted, and then waffled their way out of it, to the point when in some cases I asked to be put on paye, self employed was the way, but I never had the balls, wish I had now.
But I am going back here to blokes saying, if you get 15ph I take 1 you keep the rest , no questions lol
smithyithy said:
Thanks for the replies so far. It did read like inside IR35 to me, I think that's a bit more reassuring as it seems like less of a leap from 'full time' compared to say, registering a LTD and all that jazz.
I get the points re. paying the middle man / umbrella, although in this case the cut seems relatively miniscule.
Then main consideration seems the risk, rewards, benefits..
What I will say, is the net pay for this example with their assumed deductions etc, is about 80% higher than my current take-home, so it's not an insignificant pay rise at all. If it was something like 10-20% but I'd be losing employee benefits and having the risk of not having work when the contract ends then I wouldn't consider it..
If that's the case retain as much of the cash as possible and if the contract ends for whatever reason you've got a pot to fall back upon.I get the points re. paying the middle man / umbrella, although in this case the cut seems relatively miniscule.
Then main consideration seems the risk, rewards, benefits..
What I will say, is the net pay for this example with their assumed deductions etc, is about 80% higher than my current take-home, so it's not an insignificant pay rise at all. If it was something like 10-20% but I'd be losing employee benefits and having the risk of not having work when the contract ends then I wouldn't consider it..
As a side note, I've been contracting since 1997 and the longest I've been out of work was around 3-4 months when the first lockdown hit, literally every contractor I knew or via LinkedIn was out of work, lots were struggling to pay bills etc. Luckily for me I'd built up a tidy pot so there wasn't the same urgency to get back into a role as many others.
I've worked both outside and inside and they both have pros and cons, outside you'll need a ltd company, probably VAT registration, business bank account, possibly prof. indemnity insurance, accountant, quarterly VAT return, end of year accounts, there's a lot of admin involved to keep track of whatis coming in and going out.
Inside is easier, you just get paid like you were an employee, but the tax/NI hit is higher.
Yep, building a safety pot was definitely a first thought, I'm only a year into a solo mortgage so I'd definitely want some kind of safety net.
The overall deductions and tax is something I'd need to fully understand.
In this example, the total difference from gross to net is about 36%.... On my current payslip it's around 26%.. But then this is a higher tax bracket and could maybe be helped by paying pension (can you salary sacrifice pension under this umbrella scenario?) - so these are things I've need to get my head around.
Ultimately a higher take-home pay is a higher take-home pay, I suppose.. But you still don't want to be seeing significantly higher deductions from any amount
The overall deductions and tax is something I'd need to fully understand.
In this example, the total difference from gross to net is about 36%.... On my current payslip it's around 26%.. But then this is a higher tax bracket and could maybe be helped by paying pension (can you salary sacrifice pension under this umbrella scenario?) - so these are things I've need to get my head around.
Ultimately a higher take-home pay is a higher take-home pay, I suppose.. But you still don't want to be seeing significantly higher deductions from any amount
TEKNOPUG said:
The first thing you need to determine is whether the role is actually inside IR35. A lot of companies are lazy and just assume IR35 to cover themselves.
Not up to you, the contractor, to decide that. That lies with the end client now.If they decide its Inside IR35 - OR they just dont want to to the risk, then its inside IR35 and thats that.
Effectively by using an umbrella and that umbrella co is paying via PAYE they're side stepping IR35 entirely.
The role i'm in is all day long outside IR35, however the end client doesnt want to take that chance, but the revised day rate compensates.
Deep Thought said:
TEKNOPUG said:
The first thing you need to determine is whether the role is actually inside IR35. A lot of companies are lazy and just assume IR35 to cover themselves.
Not up to you, the contractor, to decide that. That lies with the end client now.If they decide its Inside IR35 - OR they just dont want to to the risk, then its inside IR35 and thats that.
Effectively by using an umbrella and that umbrella co is paying via PAYE they're side stepping IR35 entirely.
The role i'm in is all day long outside IR35, however the end client doesnt want to take that chance, but the revised day rate compensates.
arfur said:
Ditto here ... Public Sector - zero choice but to use Giant via PSR but the rate is fine. Last 2 years have been like this, prior to that 30 years through PSC. There is no option in Public Sector now unless you are direct to HMRC ... that's not a joke ... go figure !
Yeah even in the private sector i'm finding that - i'm usually with big global corporations and any i've been with since the determination rules changed have all not even bothered checking and blanket ruled all inside IR35.I'd find it more irksome if i was was still expected to be on customer site (as with a PSC i put expenses through the company before tax) but with a uplifted inside IR35 rate i'm happy enough. I bump a lot in to my pension to offset the worst of the taxation.
Deep Thought said:
TEKNOPUG said:
I've had multiple public sector contracts that have been advertised as inside, that I've got them to change to outside.
That surprises me greatly. I dont see what would be in it for them in doing so, other than additional risk.Gassing Station | Jobs & Employment Matters | Top of Page | What's New | My Stuff