UK remuneration & taxation

In the UK, there are two main types of working status – you are either an employee, which we will call Standard employment or you are incorporated as part of a Limited Company. In both cases you are liable to UK Income Tax as well as National Insurance.

Standard employment

Most temporary and contract workers in the UK are employed by the company they are working for. Whether they are being paid weekly or monthly, both UK Income Tax and National Insurance are deducted by the employer before the employee is paid. This is known as PAYE (Pay As You Earn).

Once employed, you need to register with the Department of Social Security to obtain a National Insurance Number for taxation purposes. You will be required to show your passport and supply a letter from you employer (agent) as proof of employment.

Income Tax

The amount of Income Tax you pay is based on your Taxable Income. Your Taxable Income is the difference between your Gross Pay (total earnings) and any allowances against taxation - commonly your Personal Allowance (the amount you can earn before paying tax). Your Personal Allowance is allocated on a weekly basis for the purposes of calculating your tax liability.

·         The Personal Allowance for the tax year 2006/2007 is £5,035.00, so, if you are a single person, the first £5,035.00 is tax-free.

·         The next £2,150.00 is taxed at 10%.

·         The next £31,150 is taxed at 22% and thereafter everything is taxed at 40%.

National Insurance

National Insurance is a deduction that covers entitlements to a number of state benefits including a pension and free health care from the National Health Service (NHS). Both employers and employees are liable for NI and it is deducted at source. The weekly earnings brackets are as follows:

Up to £97.00 per week            Nil

£97.01 up to £645.00              11%

Over £645.01                          1%

Basic tax and NI calculations

Limited companies

A significant number of interim workers form their own limited companies, become directors of those companies and invoice their agency or the company using their services. The money is paid into their limited company's bank account and in effect does not belong to them. These company earnings can then be distributed in a number of ways including salary or dividends. This approach shifts the responsibility for deducting income tax and NI from the employer to the director(s) of the company, which can lead to tax advantages over PAYE, as certain operating costs are tax deductible and there can be NI savings depending on the level of salary versus dividends paid. However, both Income Tax and National Insurance must still be paid.

IR35

The tax and NI benefits of a temporary worker using a limited company have been brought into question by IR35. IR35 is legislation relating to what the Inland Revenue will accept as the proper use of a limited company. If the Inland Revenue decides that a person working through a limited company is really an employee who should be paying standard PAYE and National Insurance then the director(s) may face a claim for unpaid taxation. You should seek professional advice on this matter. For further information visit: www.inlandrevenue.gov.uk/ir35

Managed service companies

As a result of recent government legislation, Barclay Simpson will not pay any contractor invoices from a Managed Service Company after April 5^th 2007. For more information on this legislation please go to:

http://www.hmrc.gov.uk/budget2007/bn46.htm