Contracting Guide
When an individual secures a contract, whether short-term or long-term, he or she has to decide the most efficient way to work. The most efficient will be the way that maximises income and minimises cost.
Since IR35 was implemented in 2000, nearly all contractors are now caught. This legislation applies to all individuals supplying their services through an intermediary such as a service company or partnership, and all individuals working for "composite" or "umbrella" companies.
Click here for more information on IR35.
Before the introduction of IR35, it was traditional for contracting individuals to run their contracts through their own Limited Companies. As both Director and an Employee of that company, they could pay themselves a small salary (on which Tax and National Insurance is charged), and the bulk of their income was taken in the form of dividends. This avoided National Insurance by both the employer (their Ltd Co.) and the employee.
Since IR35 has taken away the option of using dividends in such a significant way, the tax and National Insurance advantages of running a Limited Company have greatly diminished. Add to that the Accountancy Costs and the time spent on running a Limited Company and the onerous administration, and the Limited Company option becomes less desirable still.
A few contractors have tried to set up on a Sole trader basis, but have found many difficulties when dealing with clients and agencies, many of whom refuse to deal with Sole traders.
Since IR35 was implemented, an offshore option was also developed using what is commonly know as an Employee benefit Trust (EBT). Setting up Offshore Companies is a grey area, and many individuals have know found that this has had serious ramifications with regard to further tax liabilities, penalties and interest charged by the Inland Revenue. As a consequence, many EBT Schemes have collapsed, and some those who chose this option have suffered financial loss.
Composite companies have also been set up, with which a contracting individual is a shareholder as well as an employee, thereby giving the opportunity of paying part of remuneration through dividends to avoid some National Insurance. However, these individuals still found that they were caught by IR35, which has negated the benefit of Composite Companies, leaving the Inland Revenue open to penalise those whom they saw as evading tax or National Insurance.
Clearly the most efficient and safe and dependable way of working your contract is through an umbrella company or employment management company. Working this way puts you on a company payroll system and takes away all worries about IR35, and concerns about Income Tax and National Insurance administration.
An umbrella company will invoice the client, and then pay the contracting individual a salary, taking care of all Income Tax, Employers and Employees National Insurance considerations.
Click here for more information on Umbrella Companies
An Employment Management Company such as Alternet Ltd takes this a step further and provides a complete employee payroll management and financial package for contracting individuals. Alternet provides individuals with an efficient and Inland Revenue approved way of working in the contract market, without any of the hassles associated with running their own Limited Company. They also provide individuals with financial benefits usually only associated with permanent positions, such as company pension, income protection and private medical insurance.
Not only is Alternet a solution to IR35, they have a generous dispensations and expenses policy allowing contracting individuals to actually increase their net earnings. This allows individuals to continue to enjoy the benefits of contracting without the head-aches of IR35, Limited Company administration and Accounts.
More and more people are becoming increasingly aware of the many cost-effective advantages of letting Alternet run their payroll, expenses and accounts, not just for the services that are needed for their business, but for the increased profitability of their work as well.
Contact us and let us explain to you how.