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PAYE vs LTD Company Contracting - which is really better for you?

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Historically, workers such as drivers had certain advantages if they opted to become a Ltd Company Contractor (i.e. self employed), mostly these related to tax.

However, since the Government crackdown on ‘disguised employment’, and also the changes to the way tax is charged for smaller contractors, the advantages of being a Ltd Company Contractor have, in our opinion, all but disappeared.

On the other hand, in recent years the benefits to agency workers on PAYE have increased very significantly, and now include:

Paid annual leave – this means that agency workers on PAYE can rest assured on getting the same paid annual leave as many of their permanent counterparts, meaning they don’t have to save up extra money to cover nearly six weeks of annual holidays.

Statutory Sick Pay for 28 weeks if the assignment remains open. A major stress factor for the self-employed is “what if I’m ill?” and whilst SSP isn’t as much as you’d normally earn, it is something, and again puts you on a par with most full-time employees nowadays.

Maternity leave and pay, paternity, adoption leave. Maternity leave works the same way for agency workers as it does for permanent staff.

Pay parity under the Agency Worker Regulations.  After 12 weeks in an assignment, agency workers on PAYE enjoy pay parity with their permanent counterparts.

Rest breaks and limits on working time. Agency workers are entitled to breaks under the working time regulations.

The National Minimum Wage. It does not apply to Ltd Company Contractors, and because it goes up regularly it will probably overtake contractor rates within the next few years.

No unlawful deductions from wages. Being PAYE means that you have a great deal more protection than a contractor, for example an unfair accusation that you have damaged a vehicle might mean that your pay is withheld and then your only recourse is the small claims court (which costs money and might not be worth it), rather than Employment Tribunals, which are free.

Pension contribution. The Government’s pensions auto-enrolment legislation does not apply to contractors, and can provide a significant advantage.

Disguised employment. Unless you can pass the very stringent test for self-employment (being genuinely in business in your own right, the right to choose when and how you work, the right to provide a substitute, using your own tools and vehicle etc.), the taxman could come knocking on your door at any time…Take the HMRC test to check for yourself.  

Example: 

An agency offers you £10 an hour on PAYE, or £11 an hour as a contractor. An extra pound an hour looks better, right?

Look again:

Based on 40 hours a week for 46 weeks a year, under PAYE at £10 an hour you would accrue £2220 in holiday pay. This alone takes your real pay to about £11.20 an hour. With employer pension contributions at 2% (and rising) this takes your real income up by a further £618 a year, taking your real terms hourly pay to just under £12 an hour. You can even still claim for some things on your tax return even if you’re on PAYE.

Not to mention, after 12 weeks in the same assignment you will get whatever a permanent employee gets in a comparable role.

So, after you go through the hassle of preparing accounts, paying an accountant, keeping receipts, wrestling with what you can claim for and what you can’t, always with the prospect of being found to be a ‘disguised employee’ – is that extra £1 an hour (gross) really worth it?

Julian picture

Published by Julian

6 months ago

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