Alternatives to contracting through a limited company

We explored the pros and cons of contracting through a personal services company in our previous article for readers of ContractorUK.

If you have weighed these up, and decided, for one reason or another, that it isn’t for you, it’s time to look at the alternatives to a limited company, writes Lynne Gowers of contractor accountancy firm Boox, an accredited member of the Freelancer & Contractor Services Association.

Broadly-speaking, aside from supplying your services through a limited company, there are four other options to consider. Notably,  all are outside the scope of IR35, as the legislation (including the new off-payroll rules from April 2020) only applies to limited companies. And with some major banks this month initiating ‘cease and desist’ policies on their existing and future PSC engagements, it is particularly timely to address the question: ‘If not a limited company, then what else to go contracting?’

Sole trader

A high proportion of the UK’s self-employed workforce choose to be sole-traders, not least because it is a very simple business structure that is easy and quick to set up.

As a sole trader, you run your business as an individual and hold self-employed status for tax. This means that you can keep your business’s profits after you have paid tax on them, but also that you are personally liable for any losses the business makes.

As a sole trader, you’ll need to register for self-assessment and file a tax return every year. This wouldn’t be too arduous for contractors, however, as both of these requirements will be familiar to them. Less appealing about the sole trader structure is that agencies, and clients, have traditionally been opposed to engaging such unincorporated businesses.

Umbrella company

An umbrella company acts as an intermediary between you and your agency or client. They are a good choice if you are contracting in the short-term, or if you don’t want the burden of administering a business or chasing invoices.

The umbrella company agrees an assignment rate (or charge-out rate) for your services. This rate includes all the costs of employing you (such as the holiday pay and employer costs) as well as their profit margin.

You then become an employee of the umbrella company, so all of your tax, pension and NI contributions are deducted for you directly from your income. And as an employee of the umbrella, you are entitled to statutory employment benefits, such as sick pay and holiday pay.

A word of warning. however There are a lot of dodgy tax schemes around professing to be “umbrella companies”, so do your homework.

Agency PAYE

Another alternative to ‘Ltd’ is to be paid PAYE through your recruitment agency. However, this comes with a big caveat  -- that not all agencies will have the infrastructure to take contractors onto their payroll!

The upside of being employed by the agency is that it’s very simple -- you just need to sign your contract, submit your timesheets and get paid.

However, while your take-home pay should be broadly the same as umbrella, being employed by the agency isn’t the best option for you if you change assignments frequently and don’t want to be tied to one agency. This is where umbrella employment offers greater flexibility.

Direct PAYE

Some end-clients have already pre-empted the changes to IR35 in April by opting out of the legislation’s scope by engaging contractors only on a PAYE basis. As referred to at the outset, these clients include major financial institutions such as Lloyds and Barclays.

Traditionally, contractor rates are much higher than their permanent equivalents, so it remains to be seen whether end-clients will absorb the cost of tax, NI and the Apprenticeship Levy, or if contractors will be expected to take the hit. One bank in particular has claimed it will not offer rate adjustments. Some experts, however, have their doubts about whether those saying there will be no compensation in the form of higher pay will stick to this stance.

Almost regardless, some contractors are actively deciding to move into permanent employment, valuing stability and the benefits of employment and integration into an organisation above the flexibility of contracting, especially in these uncertain times.

Limited … or not?

Ultimately how you decide to operate as a contractor, whether as a limited company or otherwise, is up to you. It will depend, among other things, on how much control you want and your long term plans -- just be sure to look at the big picture and the small print of each option. Hopefully, in this article series, we’ve given you some pointers. But if in doubt, enlist the help of an accountant or business adviser. This is a decision not worth skimping on!