One of the most consistently challenging aspects of contracting in UK is complying with the country’s tax system. As well as paying tax in UK, you might also still be eligible to pay some tax in your home country, and understanding the legislation behind this can be a challenge.
The UK tax system is not designed to be easy for contractors. Successive governments have introduced clumsy and poorly applied legislation like IR35. This has caused huge disruption within the contracting industry but raised very little revenue for the HMRC. But even within this environment the UK is somewhat unique in having a huge variety of payment structures available to contractors. One thing all payment structures have in common is at least part of your earnings must come through a UK payroll.
Paying Income Tax in UK through Your Employer
Permanent employees will go entirely through the PAYE (pay-as-you-earn) system. Using the income tax and national insurance tables supplied by HMRC your employer will deduct your tax and social security contributions from your gross earnings and pay the remainder to you. They will supply a payslip stating the pay period, gross salary, tax and EE NI (employees National Insurance) deductions as well as the net salary paid to you. It may also list the pension contribution made by your employer. Because . This means that they calculate and process your taxes in UK for you and then send you a net wage. You can calculate your PAYE earnings using our payroll calculator. PAYE is the simplest way to get paid because your income tax and deductions are automatically made for you. However contractors getting paid PAYE would be going through their agency, not the employer directly. Agencies may levy a small fee for this service, but they also don't allow any of the common, fully legal means of reducing your taxable income.
Tax for Foreign Workers in the UK
Whether you’re a contractor or a permanent employee, foreign workers have to pay tax on all of their earnings whilst in the UK. As well as paying taxes in the UK, foreign nationals may still be eligible to pay some tax in their home country, and understanding the legislation behind this can be a challenge. Where are you tax resident? Are you covered by a double taxation agreement with the UK? It will depend on your nationality, visa type and the length of your stay in UK. Using a specialist in international tax for contractors is strongly advised.
Working Out Income Tax in UK Yourself
It can be tempting to take a DIY (do it yourself) approach to tax in UK by using your own Limited Company or going Self-Employed. For the majority it will increase their take home pay but the administrative burden is much higher. We estimate it takes 30 hours of administration per year to be self-employed, at least 72 hours a year to run your own limited company and only 3 hours to be a PAYE employee. This is factoring in sending timesheets, calculating and paying taxes, statutory reporting and filing tax returns.
Not only does it take more time and effort, but it also transfers much more responsibility onto you. As the company director you are solely liable for ensuring your taxes are correctly calculated, paid and filed. Any fines or penalties for mistakes will be payable by you - for example penalties for VAT evasion can be transfered to the company director. With good advice and a vigilant accountant these risks can be minimised, but there is still a significant obligation on the contractor to be well organised and prompt in their dealings with the HMRC.
Additionally given that income tax in the UK ranges from 20 to 45 percent, anything you can do to minimise income falling into the top tax bracket is crucial. With this potential mine field of regulations that change with every budget, a tax office that aggressively targets contractors and high tax rates : the benefits of getting good advice are massive.
Using an Umbrella Company for Income Tax in UK
This is our recommended option for most contractors in the UK because the net retention is higher (up to 82%) and the administration is marginal. We estimate most umbrella company contractors need to do about 5 hours of administration per year, compared to 72 hours with those running their own limited companies. British umbrella companies take a number of forms including standard Financial Management Structures, EBT's, Loan Schemes and more. They all have some common attributes - they act as your employer whilst minimising your PAYE tax obligations. You send them your timesheets and receive net funds direct into your bank account along with a payslip and breakdown.
Most umbrella companies can handle workers in any industry although they might have a separate offering for workers in Oil & Gas or blue collar occupations. This is because the insurance policies are generally more expensive than for other typical white collar contracting areas like software developers and telecommunications.
The best umbrella companies are HMRC approved, meaning they have gone to the revenue and had their structure reviewed and approved. This gives a strong element of protection against current and future tax rulings. Additionally they retain the highest quality of IR35 and Tax QC protection to deal with any enquiries that come from the inland revenue. These specialists cost thousands of pounds an hour - well beyond the reach of most contractors - but because umbrella companies have so many customers all using the same structure it becomes cost effective. It means any routine enquiries from the tax office are resolved quickly and professionally.
How We Can Help You with Tax in UK
We work with UK partners in all areas from umbrella companies to personal accountants. All are proven experts in tax for contractors. We know their solutions well and can help you find which option suits. When you want to know more we can introduce you to the suppliers we recommend. This advice is 100% free and has no obligations attached. If you have any questions about tax in the UK, please get in touch with us.
If you’re working in UK under a permanent contract, many employers will handle your tax under the PAYE (pay-as-you-earn) system. This means that they calculate and process your taxes in UK for you and then send you a net wage. Your income tax, public health insurance, social security and other deductions will all be covered by this payment. This is the easiest way to handle your income tax in UK, but contractors may not be offered this service because of their short stay with each employer.
Anybody who can’t pay their tax in UK through PAYE is left with the prospect doing everything themselves.
Do you know much about UK Tax Law? Does UK have a tax treaty with your home country? You will need to find out or find someone who can help! Income tax in UK can range, and you need to be sure you are placed in the correct tax brackets.