Deciding how to pay yourself as a locum
As a locum who has made a career decision to provide your services to a variety of of end users on short to medium term assignments, you can operate under a number of different legal structures in terms of maximising your income. There are several different kinds, including limited liability partnerships and social enterprises. But for most people the choice comes down to staying self-employed, setting up a limited company, being employed as PAYE or operating under an umbrella company. Below are some details of how each of these operate.
1. Self Employed
When you are a self-employed sole trader, people are doing business with you.
If you are self-employed, business expenses will be deducted from your revenue, and you will be taxed on the profit you make. You declare this in your annual tax return, and must also pay National Insurance contributions. On a monthly basis you will take drawings from your business to live on.
As opposed to a Limited Company which has to prepare annual accounts and file returns, as a self-employed person you just fill out an annual tax return. While it is sensible to use an accountant for this, it is something you can do yourself or with the help of a bookeeper.
Your accountant will be able to advise on the most tax advantageous method to suit your circumstances.
For more information on starting up your own business or becoming self employed, visit the HMRC site at the following links:
Business Link - Legal Structure of a Sole Trader
2. Ltd Company
If you have your own limited company you will be the director and shareholder of the company. With a limited company, you can’t just take money out of the business as it belongs to the company, not you (this is the case even if you own 100% of the company). The only way to get money out is to be an employee and take a salary, or take the profits out (known as taking a dividend). The company can also repay money you have loaned it.
You will be fully responsible for:
- complying with all company and other statutory issues, including company law requirements to file accounts and returns to Companies House;
- the calculation and payment of VAT and corporation tax liabilities;
- payroll calculations and returns and various other statutory requirements;
- company administration including raising all company invoices, running a simple spreadsheet or accounting system to record transactions and appoint an accountant to deal with accounts, taxation and payroll matters on your behalf;
- ensuring the necessary insurances are in place to trade and protect your clients.
To read about how to set up a Limited Company, click on the following link:
Business Link - Setting up and registering a limited company
3. PAYE
The Agencies Act forbids a UK agency to make a gross payment to an individual. So, if you are working through an agency that doesn't run a payroll for its temps the options are to either have your own limited company or work through an umbrella company.
If you are working through an agency that will pay you through their payroll, the first thing you will experience is that the agency will reduce your pay rate to take into account the Employers National Insurance contributions. Your actual income with then be subject to full PAYE and Employee National Insurance contributions.
You will be unable to offset eligible business expenses against your earnings even though you have to incur them to do your job. The more agencies you work with then the more payroll contacts you will have so you're never on the correct tax code. Also, when you go from locum job to locum job, you will have to ensure that you are issued with a P45 each time that you change agencies.
What this means is that you end up paying more tax than you need to. And what about the paperwork? Although you will receive a payslip when you are paid it is unlikely that you will be able to access historical information regarding your payments when you need it.
4. Umbrella Company
An umbrella company offers many of the benefits available through a limited company but without the burden of running it. The umbrella company will employ you and it will undertake the following:
- invoices your agency/client for the hours you have raised
- collects payments from your agency/client
- calculates the PAYE and National Insurance contribution and deducts and pays it to the UK authorities
- makes a net payment into your personal bank account
- complies with all company and other statutory issues, including company law requirements to file accounts and returns to Companies House;
- calculates and makes payment of VAT and corporation tax liabilities;
- runs payroll calculations and makes returns and various other statutory requirements;
- provides business insurance to meet claims made by your clients against negligence or service deficiencies.
Although you won't be as financially better off as you would have been working through your own limited company (in terms of structuring your payments in the most tax efficient way), you may be able to offset business expenses against your gross earnings.
The key point is that all the hassle and worries associated with owning and running your own limited company brought about by the latest legislation make the safe Umbrella option a very viable option for time-starved contractors.
Maximising your locum pay
So let's weigh up all the pros and cons...........
Depending on your circumstances, the most effective ways of trading and maximising your income is to operates as self employed or through a limited company. The use of an umbrella company though not as effective, means that you can do so without the hassles of the former. Operating as PAYE for a professional who has made a career choice of being a locum and providing their services to many different end users is the least effective.
If you make the choice to operate through an umbrella company, the following are links to recommended organisations who will be pleased to educate and talk you through the benefits of using their services.
