As a Contractor or freelancer, you generally have the choice of three different methods of trading:
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Setting up a Limited Company for yourself
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Working via a PAYE Umbrella company (or PAYE through a recruitment agency)
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Working as a sole trader
Umbrella Companies and Tax
Working as a sole trader is often the simplest and also the riskiest method of trading. This is because all you need to do is to register as a Sole Trader with HMRC and fill in a tax return every year. However, recruitment agencies usually do not permit this form of trading or will require you to take out Professional Liability insurance, because:
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You can be held in breach of IR35 regulations.
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You can be held personally responsible for any liabilities resulting from your assignment, putting your savings, house and other personal assets at risk and can also leave your recruitment agency liable at a second degree.
Generally speaking, new contractors tend to start by signing up with an Umbrella Company, and will consider setting up a Limited Company through an accountancy firm at a later date.
Umbrella Companies are often regarded as a quick-and-easy alternative to setting up your own Limited company:
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They employ you and PAYE/NI is paid on all of your earnings so IR35 is not an issue.
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They tend to charge around €60 per monthly invoice that they send to your client on your behalf.
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They manage your tax contributions (VAT, NI, PAYE), your invoicing, credit control and compliance with European and national legislation.
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They usually cover your insurance for Professional Liability.
You can discount assignment related costs (travel, accommodation, mobile phone bill, hardware, even lunch) from your revenue before tax. So a contract assignment that has high associated costs may also save money on tax.
Limited Company
It is generally regarded more cost efficient to set up your own limited liability company if the hourly rate is higher than €30 / hour. This is because you are likely to have fixed costs from fees payable to an accountancy firm, but you will pay much less National Insurance as a result of not being a PAYE / employee. IR 35 Legislation therefore applies to Limited company contractors. Setting up a Limited company and a related bank account can take time and a certain amount of administration, but often an accountancy firm will also take care of this for you.
Shop around and speak with a number of umbrella companies or accountancy firms, asking them to quote what your “take-home” monthly pay would be after all costs. Your recruitment consultant should be able to recommend some companies, but essentially you will be paying the Umbrella Company / Accountancy firm to act on your behalf so ultimately the decision and the responsibility of choice lies with you, and not your recruitment agency. It is also worth considering whether or not the company can insure you for Professional Indemnity.
Please note, this information is the general opinion of ProClinical. Facts and figures should be taken as estimates and can change in time. ProClinical will not accept any responsibility for damages incurred by any individual or organisation as a result of how this information is used.