What is the most tax efficient way to operate as a self-employed worker?

One of the key pieces of legislation that impacts how self-employed workers are paid is IR35. In this FAQ, we’ll summarise IR35, which should help you understand the most tax-efficient way to operate as a self-employed worker, as it depends on your circumstances and personal preferences.

A quick answer – What is the most tax-efficient way to operate as a self-employed worker?

Working outside IR35 through a personal service company (PSC) is generally regarded as the most tax efficient way to operate as a self-employed worker. However, there are plenty of factors to consider, and we have summarised these below.

What is IR35?

Introduced by the government in 2000, IR35 legislation aims to stop disguised employees from benefitting from the tax breaks available to limited company directors. Simply put, if you are a contractor, you can be the sole director of a limited company and operate “outside IR35”. This means that in the eyes of HMRC, you are genuinely self-employed and can benefit by paying yourself with a combination of salary and dividends. However, if you are deemed to be working like an employee, you will be “inside IR35”, and there are no benefits to operating through a limited company on such assignments. Therefore, the most popular payroll choice for workers inside IR35 is using an umbrella company.

Working through a personal service company (limited company)

Putting IR35 aside for a moment, you may not like the idea of operating with a limited company (often referred to as a personal service company – PSC). While there are plenty of advantages, there are also disadvantages worth considering, including the important administrative responsibilities that company directors have. However, if you’re looking to benefit from the most tax efficient arrangement available to you, working outside IR35 with a personal service company (PSC) is the best option because you can compliantly pay yourself with a combination of salary and dividends.

Using an umbrella company

If you are working on assignments “inside IR35”, there are no tax advantages to being paid through a limited company. Therefore, you’re best option is using a compliant PAYE umbrella company for your payroll (like Churchill Knight Umbrella). A reliable umbrella company will ensure you pay the correct taxes and National Insurance Contributions (NIC). You can also easily switch between limited company contracting and using an umbrella company – depending on the IR35 status of your assignments,

Sole trader

Plenty of small business owners prefer to operate as a sole trader. Sole trader tax is relatively straightforward and the tax you pay is based on the profit your business makes (through self-assessment). However, being a sole trader has its pros and cons, and for higher earners, this arrangement may not be the most tax-efficient.

Limited v umbrella

For more information, please read our short guide: Limited v Umbrella.

Discussing your options

Everyone is different. While one professional may prefer operating with a limited company (exclusively working on outside IR35 assignments), another with similar circumstances may prefer to be a sole trader. However, regarding tax efficiency, the two most popular options for contractors and freelancers working on temporary assignments is having a PSC or using an umbrella company.

If you would like to discuss your options, please contact Churchill Knight today, as our professionals are on hand to provide you with the information you need to make a well-informed decision. Please call 01707 871622 or complete the short form here to schedule a chat at a convenient time.