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Contract or permanent?
One of the first decisions you will need to give serious consideration
to is whether you want to work on a permanent or a temporary basis. There
are, of course, advantages and disadvantages on both sides, and your decision
will depend very much on your individual situation. Here are a few of
the main points to consider:
As a permanent employee you may have the advantage of:
- A guaranteed income
- Paid holidays, possibly in excess of the State minimum.
- Paid sick leave.
- Other company benefits such as health insurance, pension, car, etc
- Career Progression
However, you would have less flexibility, and possibly earn less
money. As a temporary worker you may have the advantages of:
- Greater flexibility
- Higher earnings
- Independence
- Exposure to a wider range of experience in companies and projects
However,
- You are not entitled to the benefits of a permanent job
- Your paid holidays will be for only the statutory minimum
- You do not have a guaranteed income.
- You may not have consistency of work.
TAX OPTIONS for Temporary workers
If you choose to work on a temporary basis through an employment agency
there are still choices to be made about the way in which you pay your
tax and National Insurance. Here is a brief summary of the different tax
basis you need to consider, to help you choose the right option.
PAYE
PAYE stands for ‘Pay as you Earn’.
- PAYE is a popular choice for temporaries who are unsure how long they
will be freelancing.
- It is the most straightforward option, whereby you become an employee
of the agency you are working through,(for tax purposes only) and consequently
they take care of your tax and National Insurance contributions on a
Class 1 basis.
- However, because you do not actually work for the agency, you may
only be entitled to the State minimum sickness or maternity benefits
etc.
- Anyone can work on a PAYE basis, you just need to give the agency
your form P45 or if you don’t have one, complete a form P46.
Limited Company
If you are intending to stay in temporary employment on a more long-term
basis, setting up your own limited company is an alternative option.
To set up a limited company, you appoint yourself as a director, becoming
an employee of the firm. You then have to appoint a company secretary,
for example your husband or wife.
- Your agency will contract for services to be supplied by your company
to the client.
- Payments from your agency are made gross, and your hourly rate will
be increased to include the employer’s National Insurance contributions.
- You will be responsible for calculating your own tax and National
Insurance contributions.
- You can deduct a certain amount of business expenses (e.g. Car, travel,
training, etc) before you declare your earnings to the Inland Revenue.
Your accountant will advise.
- You will need to have your accounts prepared and audited annually
and subsequently filed at the Registrar of Companies.
- It is important to remember that you cannot treat company money as
your own personal money - you will need to be very disciplined not to
spend the money due to the government (ie.tax and National Insurance)
- It is recommended that you discuss your situation with an appropriately
qualified accountant or tax advisor before deciding to work on this
basis.
VAT Registered company
- If your company earns more than £64,000(Apr 07) in any tax year you
must register for VAT.
- An application would need to be completed and submitted to HM Customs
& Excise.
- Your agency would require a copy of the VAT registration certificate
and receive a VAT invoice with each timesheet submitted.
- VAT at the current rate would be calculated from the gross pay and
added to the pay and shown as a separate item.
Student
As a student currently enrolled in a UK college/university you can complete
a form P38. This exempts you from paying tax until earnings exceed individual
tax allowances, thereafter the basic rate will be deducted. Meanwhile
your agency will only deduct National Insurance.
Please note - Schedule D
Under section 38 of the no.2 Finance Act of 1975 employment agencies
cannot employ temporary workers on this basis.
Construction Industries Scheme (CIS)
Significant tax changes have come into effect, which will affect all
contractors and subcontractors in the construction industry, whether they
are companies, partnerships or self-employed individuals.
If you are working in the construction industry through an agency, irrespective
of whether you have a registration card, you will be treated as PAYE.
This information is intended to give you some guidance as to the various
options available. You should not rely on the general information provided
in this web site in respect of your own circumstances. Before making a
decision we recommend that you get professional advice based on your personal
situation.
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