Which Is Best: Subcontractor or PAYE?
Well, that rather depends ...
It is an interesting facet of modern life that some people have a choice between a PAYE job and working as a subcontractor through a limited company. So which one will be best for you?
Subcontractor or PAYE is a question I get asked all the time! And that rather depends ...
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When looking at the respective merits of a limited company versus PAYE employment, there are a few things to consider: salary, car, pensions, holiday pay, job security & hassle, to name but a few.
"Working on PAYE is pretty straighforward!"
As an employed person, you get paid your money every month, and someone else is responsible for making sure the money is in your bank account on the right day. Similarly, the car and your pension just get paid for you, and you can claim any expenses from your employer.
On the other hand, if you run a limited company, then you have to organise these things yourself, and sometimes that can be challenging. After all, if there is no money in your business bank account, you can't pay yourself.
Your job security is another thing that changes. As a subcontractor, you can be out of work with little notice and no compensation. As an employee, you have some rights to help protect you.
When comparing the relative merits, be aware of the things that your employer pays for you. By law, you get holiday pay if you are on holiday and sick pay if you are off sick and maternity (or paternity) pay if you have a child. If you run your own business then you are still entitled to these things, but where does the money come from?
"On the flip side then, what are the advantages of having your own limited company?"
It is possible that you will have a larger take-home income from running your own limited company. Tax works in a different way, and you can also choose whether to take your remuneration as a salary, pension contributions or to leave some profits in the company and to take those profits as a dividend.
But if you are thinking of moving from a PAYE job to a limited company subcontractor what is an equivalent daily rate?
Lets assume you earn £100,000 as a PAYE salary. Once you add on pension contributions, employer's national insurance, company car, etc, then your £100k salary turns into a cost to an employer of around £132k. Then there will be fees for accountancy and insurance that you have to pay for yourself and you need to think of £135k or even more.
We then need to think how many days you might work; if there are 260 weekdays in a year and you have 28 days holiday and 2 days off sick then you work 230 days - and £135k / 230 days gives a daily rate of £587.
"Can you command a daily rate of that or more?"
Over recent years, basic tax planning says that if you have a limited company, then you take a low salary and high dividend, which may or may not be possible!
The taxman has a series of rules loosely referred to as IR35 (after the first booklet HMRC issued on this topic). The rules attempt to tax the company's income in the same way as it would an employee's.
However, if it were possible to pay a low salary and larger dividend, then your take-home salary would be around £5,578 per month. How would that compare? Well in all likelihood it would be £500 or £600 more than your takehome PAYE salary!
Also, bear in mind that HMRC is a bit like a dog with a bone, they don't leave the rules alone but worry about them constantly and change them all the time. Make sure you check that the rules haven't changed substantially before you alter your job status!
There may be other ways in which you can use a limited company to benefit you. For example, if we could pay a salary and a dividend to other family members as well, you would potentially save tax because we can use their tax allowances. Obviously, this depends on how much they earn. If they have no other income then the savings could be big, if they have a good income then there may be no saving at all.
There is also the possibility of saving money because you have business expenses that can be claimed against your company's tax liability. Any reduction in your tax cost gives you an increase in the amount available to be paid to you.
Finally, you need to think about the hassle factor. Even with our help as your accountants to do things as we go along, there will be things that you have to do each week or month and deadlines to meet every quarter and year.
"Are you prepared for the
The honest answer is that being a subcontractor can be good or it can be bad ... it all depends on you. Your circumstances will affect whether one is best for you (or not) and it is always worth taking specific advice before making a change.
If you are interested in booking a meeting to discuss your own situation, then do give me a call on 0333 335 0422 or click here to send me an email and let's arrange to meet up.
Until next time ...
I've been an accountant in and for business since 1987 and have a wide experience of consultancy, audit, accounts, taxation and wealth planning work from individuals and small businesses to multinational corporations and charities.
My eclectic interests in growing and developing business span a number of areas … and can be summarised as strategic business advice and tax saving advice.
I have worked with the Chamber of Commerce to deliver courses for people about starting up in business and have lectured about tax for a major accountancy practice and for Milton Keynes College.
I relax by reading fiction and by getting away from the office in a campervan.