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Sometimes there is more to a payment solution than meets the eye! Dedicated as we are to supplying only the best and most accurate advice possible, we recognise the importance of understanding the vast choice of payment solutions available. What you need to be aware of, is that some of them come with complications and risks to you, but these are very rarely mentioned.
HM Revenue & Customs (HMRC) are actively investigating some of the practices used by contractors to minimise their tax payments and may well examine each of your contracts individually, rather than looking at your earnings as a whole. As a contractor, it is essential that you are very careful when you choose your payment solution.
Here’s our guide to the solutions available to you when contracting. We’ve also noted our opinions on how HM Revenue & Customs may view these solutions, should you be audited/investigated while you are using them.
This is the HMRC compliant standard used by 85% of all individuals in employment in the UK. The PAYE system is a method of paying income tax, which involves your employer deducting tax from your wages or occupational pension, before paying them to you. Wages include sick pay and maternity pay.
PAYE has the benefit of simplicity, because you pay tax over the whole year, every time you are paid. Your employer is responsible for sending the tax and NIC contributions directly to HM Revenue & Customs (HMRC), so you don’t have to do anything. However as a contractor this may not be the most tax efficient solution.
This is the methodology used by all PAYE based Umbrella Companies, including Crystal Umbrella. It avoids the entire headache of IR35 legislation as it is based on the HMRC compliant standard for 85% of all individuals in employment in the UK.
PAYE has the benefit of simplicity, because you pay tax over the whole year, every time you are paid. Your employer is responsible for sending the tax and NIC contributions directly to HM Revenue & Customs (HMRC), so you don’t have to do anything.
When you start to work through an Umbrella Company your Agency/Client is no longer responsible for sending the Tax and NI contributions to HMRC; instead, the task is performed by your PAYE Umbrella.
As a contractor, you can choose to work where you please and for any period of time your Umbrella has no contractual tie to you. However, your standard PAYE rate of pay will usually be uplifted to conver the increased cost for Employers NI Contributions. Often referred to as your “Limited Rate” this is the amount your Umbrella Company receives for each hour you work whilst under contract.
In addition to the enhanced rate you receive as a contractor, Umbrella Companies, such as Crystal Umbrella, enable you to claim back any business expenses you incur, whilst on contract, which results in higher take home pay for you.
PSC’s are commonly one-man bands, processing income as part salary and part dividend payment. In the past contractors used this method to exploit loopholes in the legislation and thereby improve tax efficiency. Contractors would typically set up a limited company and pay themselves a minimum wage, which was supplemented by dividends.
Here are some of the drawbacks of this system, which is now classed as risky for the following reasons:
You will find many agencies and clients will not allow you to use this method until you have had your employment contract reviewed by an IR35 specialist, something that can cost upwards of £150 per contract assessed.
Offshore schemes include any financial set-up in which income is moved outside the UK to avoid paying the host country’s Tax and National Insurance. Payments are usually made as distributions, loans and dividends.
HMRC’s Special Compliance Office is gearing up for a crackdown on offshore umbrella companies and other tax avoidance schemes designed for solo contractors caught by the IR35 legislation.
HMRC have warned contractors not to rely on schemes intended to ‘get around’ IR35, as it is possible they are unlikely to withstand such detailed scrutiny.
Our advice on offshore accounts is simple; if you have UK residency don’t do it! Never get involved in any kind of offshore business; it’s just not worth the risk.
Once seen as an attractive option, the 2002 Pre-Budget Report announced immediate legislation to counter the avoidance of Tax and National Insurance contributions (NICs) through the abuse of EBTs.
Under this scheme
HMRC have now closed the loophole that allowed EBTs to operate. Under current legislation, tax relief is now only allowed on PAYE payments made by the trusts, this will be on the lower salary figure and not on the loan.
The HMRC Anti-Avoidance Group has set up a team to project-manage these cases to ensure that the tax outstanding is collected systematically and consistently.