Candidate Services - Ltd Company, Umbrella or PAYE?

The Invoicing Company options available to you are:

• PAYE through the Agency
• Umbrella Company
• Personal Service Company

As a general rule, the majority of locums work through an Umbrella Company.

PAYE through the Agency

Some agencies allow you to become "PAYE" through their own payroll service.

This is the least tax beneficial option available to a locum as you pay full tax and national insurance (NI) contributions on all your earnings. In addition this option does not allow you to claim valid business expenses that would help to reduce your tax and NI liabilities.

Umbrella Company

An Umbrella Company provides a ready made invoicing vehicle for locums whilst also removing the administrative duties normally associated with contracting in the form of a Personal Service Company.

The Umbrella Company normally issues invoices on the locum's behalf, collects payments from clients/agencies, calculates tax and national insurance contributions and pays the locum their net pay direct to their personal bank account. Additional benefits often included are business expense processing, calculation of annual tax returns and the provision of company benefits at discounted rates (e.g. Group Personal Pension schemes, Permanent Health Insurance, etc...).

Umbrella Companies are popular with those who are new to contract work, as it is the easiest and quickest method to start-up.

Traditionally, Umbrella Companies were a slightly more expensive option to running a Personal Service Company, mainly because their charges included all the administration overheads, and they tended not to offer the same tax advantages.

With the introduction of IR35 the tax disadvantages of Umbrella Companies have been reduced and a new breed of internet based umbrella companies, are offering a high level service at very competitive prices. This also includes an expense dispensation that allows considerable tax savings on certain expenses without the provision of receipts!

Variations on umbrella company schemes include Managed Companies and Composite Companies.

Managed Companies normally offer similar facilities to a normal "umbrella" with additional benefits such as holiday pay and sick pay. This kind of service attracts premium charges, normally based as a percentage of gross invoiced income, to reflect the level of benefits provided.

Composite Companies also offer "umbrella" type facilities with the locum also being a part-shareholder of the "composite" company. The locum is normally paid a base salary with the balance of their income going into a shareholding "pot". The locum's share of this "pot" is then normally retrieved at the most tax advantageous time (maybe years later). A plethora of companies offering variations of this theme have sprung up in an attempt to reduce the effect of the IR35 legislation.

Personal Service Company

The most important aspect of using your own Personal Service Company is to choose a good Accountant to help you set it up and manage it on an on-going basis.

Typically, you will expect to pay £65 - £95 per month for a reputable firm. Make sure you find out what this fee includes - beware of hidden 'extras' (such as a £15 monthly charge simply for having a company car).

Many locums have tried several accountants over the years, before settling for one they feel comfortable with. At some stage, you may feel the need to move accountants for whatever reason - the best time to do this is after a company year-end, since most outstanding paperwork should have been completed by this stage.

Company Set-Up can cost under £100 and many Company suppliers advertise in the trade press. Alternatively, you can apply for a limited company direct from Companies House (but this will take longer).

Many accountants will set up your company for free on condition that you sign up as a client. The process is fast and not as complicated as it may initially seem. If you've found an accountant you're happy with, this is probably the best option.

Once you have formed your limited company, you will need to appoint a company secretary, who fulfils a legal requirement to record company meetings and perform administrative duties. In practice, this role is minimal and should not take up much time during the company year. Many locums appoint their partner, or a parent.