Guide to contracting

When you come to work in the UK, the likelihood is that you will be contracting. In fact around 80% of people we assist end up in contract work.

Contracting is a broad title that covers freelancing, contract and temp work. What unites them all is that you are not employed permanently by the company you are actually performing the work for. Given such a large proportion of Aussies and Kiwis are in the UK on a Tier 5 visa, contracting can provide the ideal level of flexibility to travel and earn because you’re not constrained by the 4 weeks annual leave that you will usually have with permanent work.

Contracting also gives you the opportunity to be paid in a more tax efficient manner by using a limited company or umbrella company. Both of these set ups have different merits which are explained below.

Umbrella Company

Becoming an employee of an umbrella company is the quickest and simplest way to get set up to be paid. When you are placed by an agency, you would let them know that you would like to be paid through an umbrella company. You submit timesheets to your agency and your umbrella company and are then paid (typically weekly) by your umbrella company. By using an umbrella company rather than working directly through an agency, you are able to claim expenses such as travel to and from the office and your lunch each day as tax deductible expenses.

There are also additional administrative advantages such as continued employment with the umbrella company no matter how often you change assignments. Umbrella companies don’t tie you in for a set period and there should be no set up or exit costs. They will charge a weekly margin for the time that you use them. They are best if you’re only going to be on a short assignment before going permanent or if you earn less than £16ph.

Global works with Global Generator and would recommend it as our umbrella company of choice.

Limited Company

Limited companies are more involved than an umbrella company, but can provide even greater tax benefit. You will generally be the sole director and shareholder of your limited company and as such, some responsibility comes with the use of this type of set up. As well as setting up your company, you will also need to set up a business bank account from which to trade.
You need to ensure you have the discipline to keep your personal and business finances separate and to be able to quarantine the correct amount of funds for your corporate tax, personal tax and VAT bills. If you’re able to do this, the rewards can be significant, close to £200 per week on a contract of £250 per day.

As director of your limited company you will be remunerated with a monthly salary, generally kept low to keep your PAYE and National Insurance bill down. Your company will make profits that you will be paid in the form of dividends. This is advantageous because you pay no National Insurance on dividends and can also take advantage of the corporate tax rate of 20%. Similar to an umbrella company, you can also claim tax deductions on expenses that are genuinely business related. To keep things as simple as possible and to ensure you follow all the rules, you should employ an accountant to do your books and returns for you. Accountants will generally charge a monthly fee for this service and should include all your returns and bookkeeping for this price – look out for companies that sting you for added costs.

Global works with Global Tax and Accountancy and would recommend them for the fully inclusive service that they provide with no hidden extras.