I'll ask you again, when was the last time you were a contractor?

Never.

But, I'll ask you a question - when did you last study the law in this area?

That is what I pay an Umbrella company for, it is the only way to work if you fall under the IR35 directive, a directive which is the clearest bit of legislation HMRC have ever devised BTW.

It is quite clear if you fall into one of the IR35 list of employment, if you do you can either work as a contractor under PAYE on a short term contract or as a contractor working for an agency which is what an umbrella company is, you can not be self employed and many companies will no longer deal with self owned limited companies. There is very little grey in this area and very little that HMRC will pick apart if you use a reputable company.

Big Graeme wrote:An umbrella company will (or should) save you their fee every month, they will keep you 100% compliant with current legislation and do all your taxes for you, all you do is fill in the expenses forms and away you go. Piece of cake to set up and they deal with invoicing and contract details for you. As far as HMRC goes you appear to be working for the umbrella company and no yourself. I use http://www.orangegenie.com they deal with people in your situation everyday, I found them to be top class, in fact they chased one debtor all the way to the small claims court for me. Thanks for the tips BG. Like i say im going to speak to quite a few different people (accountants and umbrellas) to see what is best. Just one other question. I saw on one site a write up on the pros and cons of umbrellas , sole tradering, etc and a couple of them said "not advisable if you will earn over 35k". Why is this?

Big Graeme wrote:An umbrella company will (or should) save you their fee every month, they will keep you 100% compliant with current legislation and do all your taxes for you, all you do is fill in the expenses forms and away you go. Piece of cake to set up and they deal with invoicing and contract details for you. As far as HMRC goes you appear to be working for the umbrella company and no yourself. I use http://www.orangegenie.com they deal with people in your situation everyday, I found them to be top class, in fact they chased one debtor all the way to the small claims court for me. Thanks for the tips BG. Like i say im going to speak to quite a few different people (accountants and umbrellas) to see what is best. Just one other question. I saw on one site a write up on the pros and cons of umbrellas , sole tradering, etc and a couple of them said "not advisable if you will earn over 35k". Why is this?

Cheers Gary thanks for that and see you soon mate!

You need to find out if your job role comes within the scope of IR35, if it does then umbrella or PAYE agency is the only thing you can do regardless of what you earn, if it falls outside or IR35 then sole trader limited company can and usually does work out more tax efficient.

An umbrella company is not the only way to work in respect of earnings from relationships caught by IR35. You can operate through your own company.

"It is quite clear if you fall into one of the IR35 list of employment" - what list is that? There is no specific list. It comes down to the specifics of the relationship between contractor and "client."

The £35k figure is important because that is the threshold for the basic rate of tax at 20%. Anything you earn over £35k will be taxed at 40%.

So, if you earn £50k then on PAYE you'd pay 20% tax on the first £35k and 40% tax on the other £15k.

In a limited company you would pay yourself a salary of say £34,999 to make sure you are a basic rate tax payer. Then, assuming no other costs, your company would have a pre-tax profit of £15,001 (i.e. £50,000 minus £34,999). The company would pay 20% corporation tax at that level of profit. So the £15k profit becomes £12k after tax.

Because you are a basic rate taxpayer, you can then pay yourself a shareholder dividend of the £12k completely tax free.

As an example, a person on £50k on PAYE would have net earnings of around £35k after tax and NI. A limited company on £50k would give you net income of around £38.5k.

But as BG says, you must be very wary of the IR35 rules otherwise you could end up with a substantial bill for back tax.

If you pay yourself the £12,000 dividend in the same fiscal year as you take the £34,999 then you will NOT remain a basic rate taxpayer. The dividend will create a higher rate personal tax liability of £3,000 payable via your self-assessment Return.

Dally wrote:An umbrella company is not the only way to work in respect of earnings from relationships caught by IR35. You can operate through your own company. "It is quite clear if you fall into one of the IR35 list of employment" - what list is that? There is no specific list. It comes down to the specifics of the relationship between contractor and "client." I should have used the word band rather than list, a decent explanation of current IR35 implementation is here http://www.hmrc.gov.uk/ir35/guidance.pdf IMO there are ways of avoiding the charges an umbrella company make but for the average contractor the benefits outweigh the costs, they will use HMRC best practice advice to keep their clients compliant with tax law without the contractor having to be (or employ) a tax expert. An accountant may be able to save a few quid when compared to an umbrella but that may involve flying closer to the sun than I am comfortable with.

Dally wrote:An umbrella company is not the only way to work in respect of earnings from relationships caught by IR35. You can operate through your own company. "It is quite clear if you fall into one of the IR35 list of employment" - what list is that? There is no specific list. It comes down to the specifics of the relationship between contractor and "client." I should have used the word band rather than list, a decent explanation of current IR35 implementation is here http://www.hmrc.gov.uk/ir35/guidance.pdf IMO there are ways of avoiding the charges an umbrella company make but for the average contractor the benefits outweigh the costs, they will use HMRC best practice advice to keep their clients compliant with tax law without the contractor having to be (or employ) a tax expert. An accountant may be able to save a few quid when compared to an umbrella but that may involve flying closer to the sun than I am comfortable with.