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If you know how the Tax System works in the UK, you can use it to your advantage and save yourself some money. Make sure you stay informed and on top of your game by reading the information below:
The UK tax year runs from April 6th – April 5th each year.
You pay two types of taxes in the UK:
• Pay as You Earn (PAYE)
• National Insurance (NI)
Pay as You Earn (PAYE)
Essentially the more money that you make in the UK then the more tax you pay. The first £6,475 you make in a financial year is completely tax free. The next £37,400 made is taxed at 20% and everything made over £43,875 is taxed at 40%.
National Insurance Contributions
Along with paying tax you are also required to pay up to 11% of your gross salary income towards NI contributions. The first £6,475 you make in a financial year is completely tax free. The next £37,400 made is taxed at 11% and everything made over £43,875 is taxed at 1%.
These contributions are split up into portions and you will notice at the bottom of your pay slip the two areas your money is contributing towards;
• NHS (National Health Scheme) – You are funding all of the government doctors and hospitals here in the UK so you are able to use the public health system for free.
• UK pension scheme – this is essentially a retirement fund set up for you in the UK. If you do not plan on retiring in the UK and want to be able to access these contributions (on average £1000- £1600 pa) at the age of 65+ then it is essential that you complete an NI rebate as soon as you receive your NI number.
During your time in the UK you may move between employers. On your last day of employment at that company you will receive a P45. It basically sums up the total amount of tax paid whilst you were working for that employer. If you work in various jobs throughout the financial year then you would have multiple P45's. If you work at an employment on April 5 th your employer of that time is required to provide you with a P60. This is only ever given to you once and only on the final day of the tax year. This basically sums up the total amount of tax paid during the financial year. You must keep these documents to claim for a tax refund.
There are further taxes that do come into play should you look to work through tax structures in the UK. Don't be put off by this as it can be seen as ways in which you can actually maximise your income whilst working in the UK. Please make sure you do use compliant tax structures and there are a number of providers out in the market that promise the world. Let's say if it sounds too good to be true it most likely is! Have a look at 1st Contact's UK compliant Tax structures .
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There are various types of taxation structures which many individuals can work in the UK, namely:
• CIS (Construction Industry Scheme)
• Salaried employee or Pay as You Earn (PAYE)
• Self employed
• Through a payroll service or umbrella company
• Through a limited company
CIS (Construction Industry Scheme)
CIS applies to all businesses in the Construction Industry - builders, developers, contractors, plumbers, electricians, roofers, bricklayers, carpenters, glaziers and many other trades - in some cases it also applies to services like landscaping and cleaning. However it does not apply to professional services like Surveyors and Architects.
CIS is a special tax scheme to those working in the construction industry. You will be paying less tax and NI contributions than you would on PAYE by claiming expenses (eg: travel, tools, clothing, materials, etc). You will incur a rate of tax of 20% under this scheme, and a higher taxation rate of 30% will apply to those who have not registered.
To work through CIS you will need to apply for a CIS card. For more information visit www.inlandrevenue.gov.uk or call the Contractors Helpline on 08453667899 .
Please be aware that some industries may require you to be compliant by verifying your qualifications through a UK course before you can legally work in the UK for example a qualified electrician. These details can be confirmed with your Recruitment Agency or have a browse through Northwest Careers Advice .
Salaried employee or Pay as You Earn (PAYE)
As an employee, your recruitment agency or client is responsible for deducting PAYE Income Tax and National Insurance at source, meaning that there is minimal ongoing administration from your point of view.
• You are paid directly by the agency/client and full PAYE and NI taxes are deducted at source.
• Often required by Agencies/Clients on a long term employment.
• Little or no involvement on your behalf, and no additional costs.
• Usually the highest level of tax.
Self Employed
To register as self employed, you simply need to contact HM Revenue and Customs (HMRC) within 3 months of starting work. Registering as self employed is the simplest way for a contractor to set themselves up in business.
• Agencies/Clients pay into your account and you pay yourself.
• You are responsible for paying your taxes across to HMRC which is simply declared on a self assessment tax return
• Usually the highest level of tax
• Relatively low level of ongoing administration which should translate into low accounting fees.
• Benefit may not be as high as a payroll or Limited Company
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Payroll or Umbrella Service Company
Payroll/Umbrella companies essentially act as third party employers to contractors and have become an increasingly popular option. One of the advantages is that you can enjoy many of the benefits of being “in business” along with the convenience of being an employee.
The Umbrella Company is responsible for all of the back office administration, such as invoicing and payroll, recruitment agencies and clients can afford to pay higher premium or “company” rates to contractors. You will have little or no extra administration to do than if you were a PAYE employee of your agency/client.
• Your agency/client pays into a company of which you are an employee, you receive your income net of PAYE and NI taxes, however you can off-set expenses prior to this tax calculation resulting in a higher take home pay.
• Low involvement on your behalf, and generally considered the “hassle free” option.
• Fees are taken per invoice and there are no set up or closure fees.
• Typically beneficial for individuals earning less than £20 per hour (under £40,000/year).
• Don't forget to claim back your flight cost to the UK if you bought your Kickstart Pack before arriving here.
You are able to offset basic work related expenses against your tax through an Umbrella Company. However, you should be wary of other Umbrella Providers who promote “special expense dispensations” without the need to provide receipts. HMRC have made clear their intention to challenge companies that encourage tax avoidance through fraudulent expense claims.
Most Umbrella Companies do not charge set up or exit fees and only take a small administration fee for processing a contractor's pay.
Read more about 1st Contact Umbrella .
Limited Company
The setting up of a private limited company has long been a popular choice amongst professional contractors/freelancers and can be particularly rewarding for higher income earners and those whose contracts fall outside of IR35. Unlike self employment, a business that is incorporated as a limited company is a separate legal entity to its owners (shareholders). A clear advantage of this is that individual shareholders cannot be held personally liable for any company debts.
• Your agency/client pay into a company you are the sole director and sole shareholder of, which has its own business bank account.
• You pay yourself from this business bank account in a combination of salary, expenses and dividends (the best combination can be discussed with an accountant or financial adviser).
• Medium to high involvement as you are a director of your own company in the UK. Onus is on the director to adhere to all company rules therefore high degree of responsibility.
• Fees involved include set up fee's, accounting fees and companies' house fee's.
• Ideal for those who wish to maximize their tax efficiency and are earning £20 per hour plus
• (£40 000/year plus).
• 1st Contact Accounting can help set-up a company and assist with easy packaged and bespoke accounting services. Don't forget to mention your came through Kickstart to get your discount for a company and business bank account set-up.
You can choose to draw a salary from your company to suit your own personal financial circumstances. Your director's salary is subject to personal tax and NI in the usual way. Profits for small companies are taxed at a flat rate of 21%, (compared to the 40% top rate of tax for employees). The rest of your income can then be drawn as dividends from the company's net profit Dividends do not attract National Insurance and you only pay personal tax on any dividends drawn over and above the upper tax threshold (£43,375). Furthermore a company can be a very tax efficient vehicle through which to make investments (e.g. into an executive pension).
The UK government has been turning to ever more drastic legislation to counter what they see is widespread tax avoidance by contractors, who they believe are using companies to “disguise employment” and pay business levels of tax when they should be taxed as employees. It is therefore vital for you to seek advice from reputable and regulated accountants to ensure that you stay within the rules and do not become overwhelmed with the potentially costly compliance burden.
Find out more about 1st Contact Accounting services.
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