Getting paid if you’re Self-Employed

For self-employed people, such as contractors, sole traders, freelancers, and those running their own limited companies, getting paid doesn’t always carry the same certainty as it does for those in full-time employment.

Understanding when payments are made and managing pay from multiple employers can be tricky. Furthermore, the challenge of maximising your take home pay while safeguarding against ‘worst case scenarios’ can be a daunting prospect.

Many people in employment rely on regular, secure pay checks in order to properly manage their finances. So, attempting to streamline pay from different contracts can make it difficult to put cash in the bank, long-term. Especially when you have varying start and end dates, and different pay rates.

How you manage payments will boil down to your employment status. I.e. whether you go limited and set up your own company, or become ‘employed’ by a professional employment company. These are often referred to as employment umbrella companies. Each will have an impact on how, when and who you get paid by. It’s a complex business, so here are some helpful hints on when you might get paid, how much you can expect to get, and how you can maximise your money.

Choosing umbrella

For lots of self-employed people, operating through an umbrella company is more straightforward. It allows you to manage your payments and remain compliant. Benefits can include insurance, security, continuity of employment and support in an HR capacity.

So, how does it work?

Umbrella companies employ workers who are on fixed term contract assignments. Essentially, they’re intermediaries between yourself and your end client or agency. Your agency pays the umbrella company, who then pay you, the contractor, through PAYE – as if you’re a full-time employee.

This means that tax and National Insurance contributions (NICS) get deducted by the umbrella company on your behalf. It serves to simplify your administrative and financial responsibilities. So, you don’t have to worry about filing things like tax returns. For more information on what an Umbrella company is, read our blog post here.

Here’s our co-founder and Executive Chairman, Damian Broughton MBE, on how umbrella employment works in practice.

“The role of the professional employment company is to manage your finances. They make sure you are tax efficient and, most importantly, ensure you get paid regularly and on time,” said Damian. “The amount you receive depends on how much you charge your clients. A decent umbrella company will be able to provide expert advice on pay rates and what you can expect to take home.”

How and when will I get paid by an umbrella company?

When you join an umbrella company, they sign an agreement with your end client or recruitment agency. Following that, a contract of employment is then agreed and signed between you and your umbrella company. You are then classed as an employee of that umbrella company.

In terms of payment, you’re often required to provide a weekly timesheet detailing your expenses and hours of work, etc. The umbrella company, with whom you have an ‘overarching contract’, will then invoice your agency or client for the money owed.

The umbrella company will then take care of your tax payments, NICs and any other deductions required by law. They’ll also retain their margin before paying your wages into your bank account. After each payment, you’ll get a payslip and reconciliation sheet. This will detail, and break down, exactly what you’ve received.

Do I have to pay if I’m not working?

With Danbro’s employment umbrella solution, you’ll only pay a margin when we process your pay. So, there are no extra margins, clauses, or set up charges to concern yourself with.

Going limited

Incorporating a business is the process by which a new or existing business registers as a limited company. It therefore becomes a legal entity with a distinct identity from those who run or own it. The benefits of incorporation are ample, from funding and financial protection to pensions and succession planning. Going limited could be a good option for you, particularly if you’re a higher earning contractor. Accountants can also help limited companies maximise their pay and manage their tax returns.

If you trade as a limited company, the most common way to pay yourself is through a combination of salary and dividends. This will keep your salary lower and minimise the amount you pay in terms of tax and NICs. Remember though, the salary you draw is dependent on the amount your limited company turns over. You’ll then take a dividend from the business.

Setting up a business is a challenge, but one that has the potential to be extremely rewarding. To help you navigate the complexities of forming your own limited company, here are some things to bear in mind.

Before you decide whether to incorporate your company, it’s always a good idea to speak to an accountant. They’ll help you determine if it’s the best option for you and your business moving forward. Danbro can take care of your incorporation for you. After all, it’s what we do best. For more information on incorporating your business, click here for our free guide. And remember, at Danbro we provide both limited company services and employment umbrella solutions. So, if you’re uncertain which solution best suits your interests, you can rest assured that we’ll give you unbiased advice on which option to go for.

How much contract income will I take home if I operate my own limited company?

Operating a limited company allows you to make tax plans and minimise the amount of tax you have to pay. Your personal Danbro accountant will be able to discuss your contract income – and more – when you join.

Do I have to pay income tax on dividends?

A dividend is a portion of a company’s profits that can be given to shareholders.

If you receive dividend income, it will not be subject to NICs and the first £2,000 per annum is tax-free. Dividends above this threshold, which fall within the basic rate tax bracket, are taxed at 7.5%. If they fall into the higher rate tax bracket they will get taxed at 32.5%.

How can I maximise my income if I’m self-employed?

Umbrella companies can help you maximise your money – and encourage your savings – by claiming any ‘allowable expenses’ you’re entitled to. Should you register with Danbro, we’ll ask you to complete our ‘workers questionnaire’. This will determine your eligibility to claim allowable expenses. According to HMRC, allowable expenses are “incurred wholly, exclusively and necessarily in the performance of your duties”. If you’re entitled to claim expenses, you can submit your claim through our online portal.

It’s worth noting though that, three years ago, changes were brought in which affect people working under ‘SDC’ (Supervision, Direction, or Control). The changes mean that those individuals can no longer claim certain expenses. However, they may still be able to claim allowable expenses. For more information on SDC and expenses, download our FREE guide here.

On the other hand, if you operate as a limited company, there are other ways for you to make the most of the money you earn. Here are Damian’s five top tips on how limited companies can maximise their money.

  1. “It’s important to keep your accounts in good order. This will help simplify and speed up certain processes, minimise accountancy fees, and allow you to look at the best ways to deliver savings through a salary and dividend mix.”
 
  1. “Make sure you hit all your accountancy and statutory deadlines – especially your annual return. The penalties can be significant. Also, don’t forget to register for VAT if your turnover reaches £85,000 over 12 months.”
 
  1. “Time your dividend payments carefully. If you’ve already reached the higher rate threshold, try to delay drawing down profits until the next financial year.”
 
  1. “Claim any expenses related to fulfilling your business duties. This could deliver a wealth of tax savings.”
 
  1. “Finally, consider setting up an executive pension plan. Your company can invest pre-tax income into the pension, which provides major savings compared to paying into pension schemes post-tax.”
If you’re unsure how much you’re likely to earn as a contractor, why not use a take-home pay calculator?

How do I calculate my take-home pay?

With a take-home pay calculator, you can better estimate your finances and work out what you could, and should, be getting paid as a self-employed person. When applied appropriately, take-home pay calculators can provide valuable information about your earnings. They allow you to make accurate predictions and forecasts, and put in place plans for yours or your business’ financial future.

It can be challenging to get an accurate assessment on your income. This is particularly pertinent if you’re not an expert in things like tax legislation, IR35, or self-employment regulations. Danbro’s comprehensive take-home pay calculator factors in your contracted rate, pension contributions, tax commitments, IR35 status, payment cycle, accountancy fees, potential expenses, and the hours you work each week.

Our take-home pay calculator is simple, straightforward and FREE to use; it follows a set criteria and applies relevant tax legislation. So, you’ll gain a greater understanding of what your take-home pay might be once necessary deductions have been made. It also provides information about what you can expect to earn from contracts you may be considering. Calculations are made using Tax and National Insurance rates from the current tax year. They’re based on the following assumptions:

  • You work 52 weeks per full tax year (4.3 weeks per month).
  • Your tax code is 1250L.
  • 8% pension contributions, capped at £67.52* (this does not apply to limited company calculations).
  • You don’t have earnings from other sources during the current tax year.
*This cap is due to the ‘upper earnings threshold’. You can increase your pension contributions through private pension schemes.

How do take-home pay calculators work?

With our calculator, you’ll get an accurate estimation of your take-home pay in just a few seconds. Here’s how it works:
  1. Using the sliders, select your ‘hourly rate’ and ‘hours worked per week’.
  2. Choose your payment cycle, i.e. per week or per month.
  3. Click to ‘calculate your earnings’.
You’ll then receive four results for your likely earnings, depending on both your chosen solution and your personal circumstances. This includes:

  • Limited Company (inside IR35)
  • Limited Company (outside IR35)
  • Employment Umbrella (with expenses)
  • Employment Umbrella (without expenses)
Please note, these figures are for illustrative purposes only. For more information on working out your take home pay read our blog here.

What things do I need to consider as a self-employed person?

  • Whether you’re self-employed, or if you run a limited company, there will always be costs to meet. From vehicle and business insurance to equipment and accountancy fees, your expenditure has an impact on your take home pay.
 
  • As a self-employed person, you should plan your finances carefully. Ensure that you charge your customers appropriately, understand all the costs involved in running your operation, and avoid leaving yourself out of pocket. Also, make sure you have enough funds to tie you over while you secure work and establish your business.
 
  • The cost of training yourself is also something you may have to bear. It’s crucial that you remain on top of your game (and your industry) as a self-employed person. So, whether it’s updating your skillset or if you need to develop your understanding of new processes, you might need to partake in certain training programmes.
 
  • Consider replacing or reinforcing some of the protections and insurances you may have had as an employee. This will ensure provisions are made for yours and your family’s future. One of the most important is to set up a pension. There are some good, tax efficient opportunities for pension plans as a self-employed person. For instance, the Danbro One pension scheme is available to those who select our umbrella employment solution.
 
  • Unless you’re ‘employed’ by an umbrella company, you’re unlikely to reap the benefits of holidays or maternity / paternity pay as a self-employed person. Therefore, it’s important to ensure that you’re financially prepared for such eventualities.
 
  • Likewise, you should consider sickness and life insurance policies. If you don’t have the support of a permanent employer, it’s your responsibility to put provisions in place if, for any reason, you’re unable to work.


Will I get affected by IR35?

IR35, also referred to as the Intermediaries Legislation, is a tax law affecting freelance contractors. It aims to prevent individuals who’d ordinarily be viewed as an employee, from offering their services through a limited company. This is usually done to avoid paying Income Tax and NICs.

IR35 deals with the contentious issue of ‘disguised employment’. It targets those who falsely position themselves as sole traders or limited companies. Umbrella company employees, on the other hand, are generally considered outside of IR35.

To determine the employment status of an individual, three prerequisites of employment need to be met.
These are:

  1. You’re required to provide the service personally.
  2. You’re subject to SDC over the manner in which the work is performed.
  3. There’s a mutual obligation between both parties. I.e. your employer is obliged to provide work and you’re obliged to make yourself available to do the work.

How do I stay ‘outside’ of IR35?

The impact that being inside IR35 can have on a contractor is significant. You could be paying far more tax on your earnings. However, there are a number of ways to ensure you remain outside of the regulations. Here are our five top tips for remaining outside IR35.

  1. Act like a business

  2. Differentiate yourself from your end client’s employees. This begins with the contract you sign and the tasks you perform on a day to day basis.

  3. Review your contracts

  4. Avoid signing a contract until you’ve taken professional advice and are satisfied with the terms and conditions relating to IR35.

  5. Gather evidence

  6. Keep records and details of particular tasks or events which show how you acted differently from an end client employee.

  7. Market your business

  8. Choose a business name, create a logo and business stationery, etc. and sell your services via a company website.

  9. Understand your sector

  10. This is crucial. Seek advice and gain awareness of any rules that may apply to your sector, which mean that IR35 is automatic.


Who decides if IR35 applies to my contract?

If your assignment is in the Public Sector, the responsibility for IR35 determination lies with your end client. However, if you have a contract in the Private Sector, it is down to you – as director of your limited company. We recommend that you seek professional help before making a final decision.

What happens if IR35 applies to my contract?

If IR35 does apply to your contract, your company will have to pay Income Tax and NICs that it wouldn’t otherwise have to pay.

Income Tax and NICs are more commonly associated with a salary rather than business income. So, IR35 includes a calculation to convert contract income into a taxable salary amount, or ‘deemed salary’. For more information on the calculation of a deemed salary, click here.

Contact us

To discuss the outcome of your take-home pay calculation, or for a more in-depth discussion about contracting or Danbro’s employment and limited company solutions, get in touch with our dedicated team now. Or, enter your details on the form below to request a call back.

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