There are generally three options – Agency payroll, Umbrella company and your own limited company (Personal Service Company).

Agency payroll

This is self-explanatory.  You will pay tax and NI on a salary and you should receive holiday pay and statutory sick pay.  It is simple – but often, Agencies don’t run their own payrolls – and there are no tax breaks.

Umbrella Company

you’ll be one of, maybe, hundreds of workers who are paid under PAYE by an Umbrella Company.  They will invoice your end-client for you work; and, on receipt of the invoice money, pay you after deducting their fee plus any tax or National Insurance due.  Traditionally, freelancers who are caught by the IR35 rule tended to use Umbrella Companies for two reasons:

1) the minimal admin, and;

2) you could save significant amounts of tax and National Insurance by claiming tax relief on travel and subsistence expenses.  However, since April 2016, tax relief on travel/subsistence has been stopped (when the worker is directed, supervised or controlled by an end client) which means that Umbrella Companies are not tax efficient.

 

Limited company

often referred to as a PSC. Freelancers who work through Limited Companies often use a specialist accountant (like AMS Accountancy) who will give a complete monthly reporting service, including advice for a monthly fee.  Alternatively, they can deal with more of the business admin themselves, and then use an accountant to produce annual accounts; give tax planning advice; help with VAT and running a payroll (which AMS Accountancy also offer).  A Freelancer working through a PSC will find this more tax efficient because:

  • They can be paid in dividends which saves both employee’s and employer’s National Insurance;
  • They can divide their income with a spouse/partner – and potentially save income tax
  • They claim tax relief on business running costs as well as expenses related to particular contracts.

If a Freelancer fails IR35, they will lose tax relief on travel and subsistence expenses and on business running costs, and have to pay tax and National Insurance on the Company’s income as if it was taken as salary.