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Umbrella, sole trader or limited company – your options explained

14 Aug 20 You’ve been laid off, or maybe you’re just fed up, and you’re thinking of going it alone. What are your options? Joanne Harris offers some expert advice on navigating the world of self-employment.

The activity rate of construction may be slowly returning to pre-lockdown levels, but job losses and cutbacks continue to be announced as the sector deals with the ramifications of Covid-19 and months of inactivity.

There are around three million construction workers across the UK, but since the launch of the coronavirus job retention scheme (CJRS) and the self-employment income support scheme (SEISS), the UK government is reported to have supported the wages of nearly 1.5 million construction jobs.

Like most sectors across the UK, it has forced many of those working in the industry to think long and hard about their futures and whether or not they are in the best position to push on with their careers. And for some who may have unfortunately lost their jobs, big decisions need to be made on how is best to get back into the sector.

Working for a new company as an employee on PAYE pay is one route, but there are other options for construction workers, such as joining an umbrella company; starting a limited company or becoming a sole trader and registering for CIS (the Construction Industry Scheme).

Here, we take a look at the advantages and potential disadvantages of each option to help those standing at the construction career crossroads make an informed decision and take control of their futures:

Working for an umbrella company

Umbrella companies are often seen as the first step on the road to self-employment, but because they operate in a similar manner to PAYE employers, this can help to mitigate risk and provide reassurance to those potentially moving away from direct employment for the first time.

Becoming employed by an umbrella company is usually very straightforward, as you simply have to provide details such as your National Insurance number and proof of ID, before signing a contract of employment with the company, just as you would with any other employment.

Umbrella employment is an option usually considered most suitable for workers who:

  • Want to contract short-term (for around six months)
  • Do not want the administration or responsibility associated with running their own business

Umbrella working does mean you have less control over your finances than you would if you set up in business for yourself as either a sole trader  or a limited company, as you’ll be operating as a PAYE employee, where income tax and National Insurance will be deducted at source by your employer.

Depending on whether you are subject to, or someone has the right of, supervision, direction and control you may be able to obtain tax relief of some business expenses. This will be assessed by your umbrella company for each assignment.  Perhaps one of the most attractive benefits of being an umbrella worker is the access to benefits such as sick pay, maternity/paternity pay, and other employment benefits which offer added value and peace of mind.

It is important to ensure that you look for a fully compliant umbrella company; unfortunately there are still tax avoidance schemes out there that target contractors with promises of take-home pay that cannot be achieved by legitimate means. If it looks too good to be true it usually is and often the contractor is left with a hefty tax bill from HMRC after having paid a significant amount to the scheme promotor. The Freelancer & Contractors Services Association (FCSA) is a great place to start when looking for a compliant umbrella employer.

Working as a sole trader

Another option to consider for those working in the construction sector is becoming a sole trader.

This is one of the easiest ways of running a business, but it means you and your company are bound as one legal entity. You’ll pay tax based on the profits of your business, not on what you’ve drawn from it as payment.

You will need to file a self-assessment tax return (SATR), where you’ll declare your income and expenses, and be taxed accordingly on your trading profits. You’ll also have to pay flat rate National Insurance, which works out to be £3.05 a week for the current financial year and increases slightly if your profits are more than £9,500 per annum. 

It’s easy to set up as a sole trader as you can register with HMRC online. However, make sure you register before the end of the relevant tax year, as there can be penalties for late registration.

You must register for VAT if your VAT taxable turnover goes over the threshold, currently £85,000.

There is financial risk involved with operating as a sole trader, since you will be held personally liable for any business debts, meaning if things didn’t go smoothly, you could run up debts, threatening your finances and even your possessions.

Setting up a limited company

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Making the transition to incorporating your business and becoming a limited company director is quite straightforward and we see a lot of contractors making that leap as they gain more experience and confidence, including those working in construction.

Forming a limited company and registering as the director is typically well suited to those:

  • looking to contract long-term (for at least 18 months)
  • happy to take on the responsibilities and administration associated with running their own business.

In addition to the added responsibility this option gives you more flexibility as to how you run your business. You could pay yourself a lower salary for example and choose to leave money in the business to reinvest or take on additional employees.

You will pay corporation tax – 19% of any profits made in a financial year – and may need to register for VAT depending on your turnover. You may also have PAYE income tax on your salary, if it is over the threshold of £12,500 per annum and National Insurance also applies to your salaried income. Any dividends paid out of company profits will be taxed at 7.5% at the basic rate and 32.5% at the higher rate but there is no national insurance to pay on dividends.

Once you’ve formed your limited company, it is a separate legal entity from its owners, even if you’re the sole owner and director – often referred to as a personal service company (PSC) – giving better financial security for yourself and your business.

Registering for the Construction Industry Scheme (CIS)

The Construction Industry Scheme (CIS) is a government initiative focused on payments made by any contractors to subcontractors for construction work. It is a scheme enforced by HMRC to protect construction workers from false employment and minimise tax evasion within the industry.

The scheme requires contractors to register online, and deduct money directly from their subcontractors’ payments and pass them onto HMRC.

The deductions count as advance payments towards the subcontractor’s tax and National Insurance liability. This means that when you come to submit your self-assessment tax return for the year, these payments will count towards it if the deductions are more than the total due to HMRC, a refund  will be paid.

Subcontractors are not required to register, but it is highly recommended that they do so to support their own cashflow. The deductions typically equate to 20% of the total payment but may need to be calculated at 30% for those that choose not to opt into the scheme.

Making sense of IR35 in construction

If you decide to contract through your own limited company it’s important to understand the details of a piece of legislation known as IR35, which applies equally to contractors working in construction and every other sector in the UK.

IR35 is a piece of anti-avoidance tax legislation and is the government’s attempt to ensure that those contractors working in ‘disguised employment’ pay the same amount of tax as an employee. Essentially if the relationship between the end hirer and the contractor is that of employment then the contractor will be inside IR35, this means the contractor would have to pay income tax and National Insurance as they would if they were employed. This can be difficult to determine and each assignment will need to be reviewed by your accountant or an IR35 specialist who will need to look at both the written contract and crucially the working practices.

Under the current rules, for assignments in the private sector the responsibility for assessing the IR35 status of an assignment sits with the  contractor. However, new reforms have been proposed which mean that as of April 2021, all medium and large businesses will have to take on that responsibility, and they must assess the IR35 status of each assignment, as is currently the case in the public sector.

In the case of umbrella workers, because they are employees of their umbrella company they do not need to consider the IR35 status of their assignments.

Be prepared…

As the construction industry braces itself for the challenges the rest of 2020 could bring, and many workers face an uncertain future, there is a lot to consider. But taking steps to plan your future and your finances now could prove vital.

By determining the best option for you, you’ll be in a much better place to progress your construction career on the terms you feel best match your experience and circumstances. Seek the advice of a qualified accountant if you need help discussing what the next best step might be for you.

About the author: Joanne Harris is technical commercial manager at Parasol Group, one of the UK’s biggest umbrella employment companies

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