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If you’re new to the contracting way of working and need to evaluate the various trading models you could work under, then it can be hard to navigate.
Whilst it’s important that you make your own decision and seek independent financial advice, we break down the various options below.
Understanding contracting
Temporary assignment contracts work very differently to permanent contracts where you’re typically engaged directly by the organisation you’ll be working for.
For temporary assignments your contract of engagement may be with the organisation you’ll be working with, or through the recruitment agency who they partner with to provide them with temporary workers.
They’ll be a clear start and end date, and you should expect to be told of this when you first express interest in the role. As roles can be project-based, on occasions your temporary assignment may finish earlier than predicted, but you’ll be notified of this in advance.
As a temporary contractor you’ll typically have the option to decide on the right trading model to work through for each assignment. We’ve provided a short overview of the main trading models below.
Pay As You Earn (PAYE)
If you’d like tax and National Insurance (NI) to continue to be taken at source, minimising the need for you to get involved in declaring and paying your own tax and NI, then many recruitment organisations offer a PAYE payroll service to temporary contractors.
You’ll typically submit an approved timesheet to reflect the hours you’ve worked, together with any agreed overtime and expenses, and your recruitment agency will process your pay. This may be on a weekly or monthly basis, depending on the agreement you entered into with them when you took up the temporary assignment.
As a PAYE employer you’ll potentially be eligible for a pension after 12 weeks, depending on your age. The recruitment agency, as your employer of record, will automatically enrol you into their chosen scheme – in line with the mandatory Government pension legislation. There will be a small window where you’ll be able to opt out of this if you don’t want to participate, so it’s important to check this as soon as your assignment starts. Employers are required by law to make a contribution to this pension though, so it’s a good way of planning for your future retirement.
As an agency worker you’ll also be protected by a piece of legislation called the Agency Worker Regulations (AWR). This means that after 12 weeks of engagement you’ll receive similar benefits to permanently employed workers - such as sick leave, holiday and parental time off.
Umbrella
An Umbrella is an accountancy company that contractors can work with to manage their pay. Typically Umbrella companies run a Pay As You Earn (PAYE) payroll, and will be your employer of record making the necessary deductions of tax and NI. If you’re working for various agencies, an Umbrella trading model may allow you to maintain continued employment and one pension pot.
Other benefits available differ between Umbrella companies, so it’s important to check in advance.
Before you commence work, the recruitment agency is required to provide you with a Key Information Document (KID) about the Umbrella company you have chosen, in the same way you receive one when you open a new bank account or take out insurance. This will detail important information such as the pay rate, any leave entitlement, fees and non-statutory deductions.
Limited Company
A Limited Company is a self-employed contractor, who is usually the Director of the Limited Company. They set-up and register this company to operate on a contract basis through a private business. This is sometimes referred to as a Personal Services Company (PSC), where there is one Director of a Limited Company who is the sole contractor.
This means that it is not a Pay As You Earn (PAYE) agreement, and as such you will be responsible for managing your own tax implications directly with HMRC.
As the assignment is being delivered through a company and not as an employee, an invoice is typically issued for the services delivered.
Some organisations, such as NRL, provide self-billing. This is where the recruitment agency automatically generates an invoice based on the timesheet and expenses provided and issues it to the Limited Company contractor. Invoices are then settled in the usual way.
As an independent Limited Company, you’ll also need to remember to make your own plans for building up a pension, and will require insurance policies to deliver your work.
CIS
The Construction Industry Scheme (CIS) is used for skilled workers in the construction industry. CIS covers the majority of construction work, however there are some exemptions.
Under this model self-employed contractors, often referred to as sole traders, are registered under the scheme with a UTR number and typically paid via an intermediary company who deduct CIS deductions from subcontractor payments and make payments to HMRC in advance. Tax returns are then completed, which may result in yearly tax refunds.
As a sole trader you will need to make your own plans for pension.
Consider IR35
The IR35 intermediaries legislation looks at off-payroll working, to ensure that people delivering services through their own Limited Company are paying the appropriate tax and National Insurance deductions where they are required to.
IR35 is assessed for each assignment undertaken, looking at a range of factors to consider whether the work being undertaken and relationship between the Limited Company and end client is that of an off-payroll worker, or more a line with a directly engaged employee. Where HMRC would deem the working practices to be in line with how a permanent employee would operate, they consider this as disguised employment – where tax and National Insurance deductions would be taken if the worker was on the company’s Pay As You Earn tax scheme.
The end client is responsible for issuing an IR35 Status Determination Statement (SDS) for each assignment. Where it is found to be in scope the Limited Company contractor will have deemed payments made to them, which will reflect the deducted tax and National Insurance requirements.
An SDS is relevant for the specific assignment it has been issued for, so where the tasks you’re being asked to deliver change, or you are requested to move onto a different project then a new SDS will need to be issued to you.
With IR35 applying on an assignment basis, you find that as a self-employed contractor you could typically undertake a mix of in scope and out of scope assignments, so you may need to factor this into your trading model decision.
Seek independent financial advice
We’re not here to help you decide which trading model is right for you, and legislation prevents us from providing independent advice.
We’re here to help candidates secure the right temporary work for them, then support them to implement their chosen trading model to ensure they receive the appropriate payment for the services they deliver.
If you’re undecided on which trading model is right for you, then it’s important to seek independent financial advice before making a decision.
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