Contractors' Questions: What about agents when already contracting direct?

Contractor’s Question: I always find my own work directly from clients/end-users, and complete my own tax return. But I am thinking about also joining a recruitment agency to find more work. I am not a limited company so the only way for them to pay me is PAYE, I think.  

How easy is it to fill in your own tax return once you’re contracting in a direct-to-client relationship, and working for other clients, through a recruiter and, presumably, paying PAYE? The potential complexity of juggling these two differing arrangements is putting me off from signing up with an agent; not that many of them seem to be rushing to return my calls!

Expert’s Answer: Using a recruitment agency to find more work gives you greater exposure in the market and shows that you’re a proactive contractor.

The recruitment agency will more than likely use the services of an umbrella company to manage your PAYE income from your placement. Umbrella companies charge you (the contractor) a fee for this service. Given the sheer number of umbrella services available, be sure you opt for one that gives you the best customer service and is not exorbitantly priced. Between £20 and £24 per week is reasonable, and you get to claim back your expenses, which is a considerable benefit.

When completing your self-assessment tax return at the end of the tax year, you will be required to disclose all forms of income. In your case this will include both the umbrella income (PAYE) and your Self Employed, freelance income. We recommend using the services of a reputable contractor accountant to ensure that your tax return is accurate and you’re making the best use of your tax free allowances and claimable contracting expenses.

From reading of your circumstances, the best solution would appear to be to contract through your own limited company (or personal service company). Many freelancers maximise their take home pay this way, while at the same time remaining flexible to move quickly and easily between different contracts. Working on PAYE means tax rates of around 32% (20% PAYE + 12% NI), but limited company contractors are able to claim back legitimate business expenses and pay themselves a reduced salary, meaning real tax rates could start from around 15%.

Overall, it needn’t be as complex as you fear, especially if you have a contractor accountant who can take all this ‘tax admin’ away from you, allowing you to focus on finding the right work whilst bringing in as much money as you can!

The expert was Andrew Halgryn, a director at Boox, a specialist accountant for contractors.

Monday 19th March 2012