4 Methods of Payroll Funding for a Contractor

Depending on the contractors own specific preferences, there are many different ways to process the payroll for their workers. Here you can learn more about the specific details of each payment method and the advantages it may have to offer.

Limited Company

By choosing to have their own company that is classified as limited, the contractor (also commonly referred to as manpower suppliers) will be the sole shareholder and director of the company.

As such, they will be completely responsible for:

  • Calculating the overall VAT payments as well as for the corporation tax liabilities
  • Calculating the payroll amounts, as well as the returns from various statutory requirements
  • Also, they must administer all of the invoices for the company. This is usually accomplished either with a simple spreadsheet or a system for accounting in order to accurately record and appoint professional accountants to deal with the specific accounts.
If a contractor wishes not to risk making mistakes on their accounting record or have to be responsibility, then it is recommended to hire what is known as an “Umbrella Company” to provide the service.

Personal Service Umbrella Company (PSU)

A PSU company in which is administered by what is known as the “FPS Group, is able to offer many advantages to a limited company, without completely running it of course. The FPS Group allocates a certain PSU (Personal Service Umbrella) company for each individual worker on the contract. The specific takes they handle include of:

  • Taking care of the invoicing for the hours each agency or client has worked.
  • They handle the payment collections for their client.
  • They not only calculate the PAYE and the overall National Insurance contribution, but they also take care of deducting it from the payroll to pay it to the authorities.
  • Handles the overall net pat payment to be made to the client’s personal bank account.
  • They ensure to follow complete compliance with all statuary issues, company laws for file accounts, and the required returns to the Companies House.
  • They ensure accurate calculations for making payments towards corporate tax liabilities.
  • The PSU Company ensures that all returns for the pay roll calculations are in accordance with statutory requirements.
  • They provide business insurance in case of negligence or service deficiencies when providing service to the company.
Composite Company

In actuality, there is no tax law that specifically defines the term “composite company”. This term is used on a regular basis for service-providing companies that cater to the contacting industry.

Specifically, the word composite is defined as “made up of various parts”, and when it comes to contractors, they can be a service providing company. It is also common for many contractors to have these companies as contacts.

  • These companies provide various administrative services, including of invoices, and receiving payments for services provided.
Before, common practices included of ensuring the contactor worker is paid the salary minus the expenses, where the remaining income is paid as dividends.

In was popular in the past, but not anymore. This is commonly seen as ‘tax avoidance’ by the government. With the newly introduced legislation in 2007, it now means that is now referred to as a blatant ‘tax evasion’ for IR35 workers.

PAYE through a Recruitment Agency

Not every agency for contractors run a payroll in which they place an assignment.
For an instance, in the UK, the income tax law forbids an agency from making direct gross payment to the individual for more circumstances. Therefore, if contractors choose to work through an agency that doesn’t run a payroll for its individual contractors, the two main options are either to run it through their own umbrella company that they have service with, or to have their own individual limited company.

However, if they decide to work through an agency that runs through their entire payroll, then all of the income will be completely subject to NI and PAYE contributions. Hence, contractors will not be able to offset their taxable business expenses against their earnings, although they might still have to incur the expenses in order to complete their job obligations. The bad thing is that the more agencies a contractor works with the more payroll contacts there will be therefore the tax code will never be correct.

Resultantly, what this refers to is that contractors will end up having to pay more taxes then what they have to. Also, regarding the paperwork, the contractors will receive their own pay slip once they receive their pay, but it is unlikely that they will have the opportunity to access their information about the historic payments.

Author Bio: 

Mark Long is keenly responsible for manpower suppliers in and around Dubai area. He recently solved many labor supply problems in UAE with bulk intake of graduates.

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