Pay As You Earn (PAYE)

The basic option a contractor has is to get paid directly through a recruitment agency under PAYE. Taxes and National Insurance are deducted at source. This option is generally not beneficial as you would receive salary without any allowance and end up paying more taxes.

Limited Company

The second option a contractor has is to work through their own Limited Company (often called a Personal Services Company). Under a Limited Company, you will pay Corporation Tax on the profits of the company and the take-home income is in the form of dividends. The contractor is the director and shareholder of the company wherein they are fully responsible for various administrative and statutory obligations.

With the introduction of Managed Service Company Legislation (MSCL) with effect from April 6, 2007, it is not very clear whether the company the contractor uses is a Managed Service Company or a Personal Service Company. A contractor can use the services of an accountant for this as they are exempt from this legislation. It should be noted that accountants might also come under the influence of this law because the provisions are still ambiguous. However, with the ‘Third Party Debt Transfer’ (TPDT) legislation coming into effect on 6th January 2008, some recruitment agencies do not allow their client to work through their own Limited Company services. If you do tend to use your own services you have to ensure compliance with the IR35.

Umbrella Company

The third option is to work through an Umbrella Company. An umbrella company can offer the benefits of a Limited Company without the administrative or statutory responsibilities. With an umbrella company, a contractor does not have to worry about IR35, MSCL or TPDT – as they are outside these regulations altogether. A contractor going for this option will be an employee of the umbrella company. The umbrella company then does the following for the contractor.

• • Invoicing to the contractor’s client, Credit Control and Payroll
• • Make appropriate deductions of PAYE and NI and pay net amount into the contractor’s bank account.
• • Comply with all legal issues related to Tax Authority

Self Employed

Being self-employed depends on the terms and conditions of your work. It's important to know your employment status because it affects employment and benefit rights, and how you pay tax and National Insurance. If you start working as self employed you need to register with Tax Authority as self employed and you will need to file your self assessment at the end of tax year and pay your taxes.