It can seem like a difficult choice for Contractors (who may think of themselves initially as Temporary Workers). Should work be undertaken through their own Personal Service Company (PSC) with its ability to save Tax / NIC or through a less costly third-party Umbrella Company (UC).
Here is a list of relevant factors to help the decision-making process. We have presented it as logically as possible so that one can decide easily by reading through…
1/ Life of Contract: Will the intended engagement – or anticipated series of engagements – last 12 months or longer? If so, a PSC may be worthwhile and read on – otherwise the lower-cost UC is probably better.
2/ Expected Income: Are earnings expected to be at least £2000 per month? Again a positive answer points to a PSC because of its operating costs and read on, a negative one to a UC – but see immediately below.
3/ Tax-saving potential: Do you have any general business expenses which are not linked to the intended engagement? If so, the average monthly amount of these over a period would reduce the above income threshold.
4/ Available time: It is comparatively time-consuming to operate your own company…are you willing to spend up to 2 hours per week on administrative tasks? If yes, a PSC may be for you and see below; otherwise stick with a UC.
5/ Regulatory framework: Finally even if using a PSC appears worthwhile, you have to consider whether HMRC Regulations will allow income from the intended contract to be paid without operation of PAYE. Here are some of the factors any one of which indicates that it could be allowed without such deduction:
- Is there a realistic right to substitute the worker
- Can payment be withheld for defective work or pending its verification
- Would the company gain or lose depending upon how efficiently it undertakes the work contracted
- Will the company use its own equipment or other assets in undertaking work required by the contract
If none of these questions can be answered positively, there is less likelihood that income can be paid gross. In this case a UC would probably be the better option.
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