Glossary & FAQs
IR35
In 1999 the Inland Revenue introduced a piece of legislation aimed at tackling individuals operating their own "one-man limited company" for the purposes of reducing their National Insurance costs.
The Government view was that many "Shareholders/Directors" operating via a personal service companies were merely disguised employees of the client to whom they sold their services. IR 35 sought to make such de-facto employees pay the same National Insurance contributions as a full-time PAYE employee of the client. The financial implications of being caught by IR35 are significant, as the example below shows.
| Pass IR35 (Shareholder/Director) |
Fail IR35 (PAYE) |
|
|---|---|---|
| Rate: | £300 per day | £300 per day |
| NET Income: | £56,532 | £49,084 |
| NET % of Gross: | 72.25% | 62.93% |
Assessing whether your assignment ‘passes or fails´ IR35 depends on a number of factors. Contractual terms are important, but only if they accurately reflect the working conditions; if the contract says you have autonomy but in practice you are micro managed by a person at your client company, the facts on the ground will override the written contractual details.
The key question to ask is: are you genuinely in business on your own account to provide high level professional services to clients who rely on your expertise and do not treat you as simply a temporary employee. If you are in business on your own account, do you have multiple clients, do you have a sales/marketing plan (for example, backed up by business cards, a company logo, a company website, listings in the Yellow Pages or other appropriate directories?
Lester Associates can advise on IR35 issues. However, for peace of mind and an easy life, an umbrella PAYE solution is often best.
Limited Company
As a freelance professional, if the idea of running your own business as a Shareholder/Director appeals to your nature, then establishing you own Limited Company could be the right option for you. There are many pros and cons with running your own company, but you need to be aware in recent changes in legislation i.e. IR35 There are many responsibilities assumed by those who running their own Limited Company; the amount of paperwork is ever growing, so as well as tax/IR35/MSC considerations, you should ask how much of an appetite you have for administrative paperwork. We can help with some bookkeeping and admin, but there is no getting away from the fact that this option is more burdensome than a PAYE umbrella solution.
Dividends
A Dividend is a distribution of the company´s profits to the company´s Shareholder(s). Profit is the company turnover minus the company expenditure (salaries, expenses etc).
MSC Legislation
This stands for the Managed Service Company Legislation that was passed into effect in 2007. The legislation was passed to tackle the use of "Composite Companies" by freelancers, where several non-director shareholders were all working for the same company. In addition, the HMRC looked to tackle "One-Man Limited Companies" where freelance contractors had set up their own company for tax avoidance purposes, rather than running and building a business. Typically, the Director of their own company was using a third party to manage the everyday running and no real responsibility of the day to day running lay with the Director. In either instance, the company would be caught by the MSC legislation, and all employee(s) (Directors and Shareholders) should be remunerated under the PAYE scheme instead. From a Recruitment Agencies point of view, part of the MSC legislation included the provision of debt transfer. If the Agency refers the contractor to a solution which is subsequently caught by the MSC legislation, any additional Income Tax and National Insurance payable to the HMRC could land in the laps of the Recruitment Agency.
Umbrella Company
As a Contractor, an Umbrella Company is an excellent alternative to running your own Limited Company, as it removes the risk of being caught by "IR35" and the more recent "MSC Legislation". Under an Umbrella Company, the Contractor is paid under the PAYE (Pay As You Earn) scheme, where business expenses are paid (were allowed) and the remaining billings is subject to Income Tax and National Insurance.
PAYE
PAYE stands for Pay-As-You-Earn. This is when your employer deducts your income tax and national insurance from your gross salary. The tax and National Insurance Contributions (NICs) are then paid direct by your employers to HMRC and you receive your wages NET.
National Insurance
Your National Insurance Contributions (NICs) are contributions towards your State Pension and other social security benefits. The amount you pay depends on how much you earn and whether you are employed or self-employed. Under the PAYE scheme, employees and employers are expected to pay Class 1 National Insurance based on the following thresholds:
Employees |
|
|---|---|
Primary Threshold (0%): |
L105 per week |
Upper Earnings Limit: |
L770 per week |
Class 1 rate between Primary Threshold and Upper Earnings Limit: |
11% |
Class 1 rate above Upper Earnings Limit: |
1% |
Employers |
|
|---|---|
Secondary Threshold (0%): |
L105 |
Class 1 rate above Secondary Threshold: |
12.8% |
Income Tax
Income Tax is the tax you pay on your income. Not all income is taxable, and what is taxable is only so above a certain level. Income that is taxable includes:
In relation to working through an Umbrella Company (as a PAYE employee), the contractor would be liable to pay Income Tax based on the following thresholds:
Personal Allowance (0%): |
L5,435 per annum |
|---|---|
Basic Rate (20%): |
the next L36,000 per annum |
Higher Rate (40%): |
over and above L41,435 (Personal Allowance + Basic Rate Thresholds) |
News
UK English Language test for spouses and partners to be introduced
If you wish to join or marry your British citizen spouse or a permanent resident in the UK you will from 29 November 2010 need to pass an English language test with an approved test provider...
Canada immigration funds Toronto program for minorities
The Canadian Government will be providing $300,000 of funding over four years to provide learning opportunities from ethnic groups to help them better participate in Canadian society...
UK Immigration Tier Visa refusals on basis of maintenance funds can be reviewed
Following an important High Court victory on 23 June 2010 it was judged that maintenance funds assessment must be in line with the immigration rules...
UK Tier 4 student visa English Language Tests and other changes
UK Immigration is making or has already made a number of significant changes to the UK tier 4 visa scheme for students:.....