Collaborative post on how to maximize your income…
There are many reasons why people choose to leave the relatively secure world of full-time employment and move into a career as a contractor. For some it may be about time. Working as a contractor can free up time that can be spent with their family or concentrating on another, entirely unrelated, project or business. For others it can be that they enjoy the fresh challenge that each contract brings as opposed to the monotony of a full-time job.
However, the main reason for most people to start working as a contractor is the money. The prospect of a greater income is an attractive lure, especially in today’s job market, but there are one or two hurdles to overcome once you do decide to go it alone. The most important consideration is the way that you intend to operate as a contractor. Let’s have a look at the four main ways of doing so:
PAYE – While it may be difficult to find a recruiter that is willing to run a payroll system it is worth a mention just in case you run into one that does. PAYE is what you would pay as a full-time employee so you will be liable to full tax and employee’s national insurance. You will not be able to claim back any business expenses on PAYE.
Self-employment – As the name suggests, self-employment is when you are in business completely on your own account and not working through a limited company. For this reason it is unlikely to be the right solution for most contractors as recruitment agencies are not deemed applicable by HMRC.
Limited Company – Over the years the vast majority of contractors have created their own Limited Companies to work through. The reason for doing so is mainly because the advantages, when it comes to taxation, were usually much better than above methods. With the introduction of IR35 in 2000 contracts falling within IR35 have been affected. IR35 roughly states that if without your company you would have been deemed an employee of the organisation issuing the contract you will be treated as such for reason of taxation. However, if your contracts are likely to genuinely be outside of IR35 you will still be better off with a Limited Company.
Umbrella Company –Umbrella services can offer the same structure legally as a Limited Company, but without the hassle of the admin. The umbrella company will issue all invoices, with the contractor being made an employee of the umbrella company. This is by far the best option for contractors whose work will fall within IR35, or just those who are after an easy life that is free from most of the paperwork associated with running a business.
In summary it all really depends on if you fall within IR35 or not. If you do then an umbrella company will most likely be your best option. If you don’t then a limited company should still be your first choice for maximising your income.