Before you start contracting, each MOT Tester or Vehicle Technician needs to decide the way they will get paid for their freelance work. There are two established options: setting up your own limited business or registering with an umbrella payment company. In this ‘You Asked Autotech’, Jake Betts, our Recruitment Consultant explains both payment options and their pros and cons to help you decide which one is best for you.
Umbrella Payment Company:
The process of registering with an umbrella company is usually quick and ideal for first-time contractors who want to keep all the advantages of being a contractor in regards to flexibility, but don’t want the responsibilities associated with running a limited company. Once you have registered with the payment company, essentially you are then employed by them.
You will submit timesheets to the umbrella company and they will pay you directly into your bank account as a PAYE employee.
The umbrella payment company will do all the hard work for you. They will take care of all accountancy and taxation matters and also deal with all administration.
They will also calculate your expenses and cover you with your public liability insurance. Working with an umbrella payment company as a contractor will require you to pay both employee and employer National Insurance contributions. Umbrella companies charge an admin fee for their services.
Contractors who chose umbrella payment option can look to typically take home around 60-65% of their assignment income. This does depend on how many expenses you claimed for.
Contracting as a limited business is generally more cost-efficient, but requires more work from the contractor. There are a number of issues that contractors should be aware of in running their own limited company. You will need to:
• register your limited company with Companies House
• open a business bank account
• acquire your own public liability insurance
The contractor is the director of the company and in full control of all company transactions, so it is your responsibility to submit all relevant tax and business documents to HMRC. You will oversee all invoicing and financial duties.
Contractors operating as a limited company are generally better off financially. In most cases contracting as a limited business means you can expect to take home around 75-80% of your contract income.
Below is a summary of advantages and potential downsides of both payment options:
• Most tax-efficient way to contract
• You are in complete control of your finances
• Access to flat rate VAT
• Must complete all your own paperwork
• Harder set up process
• More time-consuming
Umbrella Payment Company
• Easy to register
• Insurance included
• Tax and NI contributions are calculated for you as well as expenses. Very little admin
• You are not in control of your finances
• More expensive than going limited
• If you are a Vehicle Technician only, you cannot claim your expenses for travel to and from work (doesn’t apply to MOT Testers who can claim their travel expenses)