Freelancing startup dilemma: PAYE Umbrella employment or sole trader?
Thread poster: sommerz

sommerz
United Kingdom
Local time: 03:08
English to Norwegian
Sep 30, 2011

Hi,

As a first time poster (but long time reader) on the ProZ forums, I apologies in advance if I am making any beginner's mistakes when posting and breaching any unwritten codes of conduct.

I have been recently decided to take the step from in-house translating to freelancing in the UK, as my priorities with regards to flexibility and remuneration over stability have changed.

After having spent days digging through articles, discussions and umbrella/acountancy benchmarks/terms to try and find the pros and cons that are key to me, I'm still uncertain about the following issue: How much will I be giving up in terms of net pay by choosing the services of a PAYE umbrella company instead of registering as a sole trader and have the financial admin hassle?

  • Roughly speaking, umbrella companies charge around double compared to an accountancy firms in flat fees per month. Which is reasonable, considering they take away more of the HMRC hassle and paperwork for you.

  • As I'll be working from home only, the expenses I can claim are fairly limited as a sole trader, and even more so through an umbrella company (hardly any, it seems).

  • The invoicing itself will be fairly simple, as I'll be supplying to one or two clients with pretty standard rates per word, quite straightforward projects, terms and conditions.

    So it looks to me as the big difference between the two is the amount of NI (National Insurance) you have to pay:

      - As a sole trader, you pay Class 2 (£2.50 per week) and Class 4 (9% of income within scope of minimum and upper income threshold) National Insurance.

      - As a PAYE umbrella employee, you have to pay Class 1 National Insurance as an employee (11% of income within scope of minimum and upper income threshold) AND, in practice, pay for Class 1 Employer NI (12.8%).


    So, if we simply disregard income tax, fees and expenses, if my annual gross income (WITHIN the named threshold for NI rates) was £25,000, I would:

      - As a PAYE umbrella employee, pay £5,950 in NI
      - As a sole trader, pay £2,380 in NI


    So: I would be paying £3,570 more in NI as as an PAYE Umbrella employee than as a sole trader (on an annual income of £25000 within the thresholds of basic NI rates).

    ----

    Are these calculations correct, or have I missed out on anything vital (not explained earlier in the text) that e.g. makes the umbrella company a more attractive solution (keeping the simplicity of my business and the lack of claimable expenses in mind)?

    Have any of you got experiences with a similar dilemma of choosing sole trading vs. PAYE Umbrella employment? If so, I'd love to hear what you've chosen to do and why!


    Many thanks,
    Steinarr

    [Edited at 2011-09-30 14:05 GMT]

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  • Alexander Onishko  Identity Verified
    Local time: 05:08
    Russian to English
    + ...
    *** Sep 30, 2011

    [removed]

    [Edited at 2011-09-30 15:09 GMT]


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    sommerz
    United Kingdom
    Local time: 03:08
    English to Norwegian
    TOPIC STARTER
    You're right Sep 30, 2011

    That bit wasn't supposed to make the final text, sorry. Thanks for pointing it out, Alexander, I have now removed it.

    Now, back to the matter at hand.


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    Sheila Wilson  Identity Verified
    Spain
    Local time: 03:08
    Member (2007)
    English
    + ...
    Claimable expenses Sep 30, 2011

    Hello,

    Welcome to taking a more active role in ProZ.com. I'm sure we'll see more of you now that you are branching out on your own.

    I left the UK nearly 20 years ago, so I can't help with anything specific - hopefully someone else will help. However, I'm really surprised to see this:

    sommerz wrote:
    As I'll be working from home only, the expenses I can claim are fairly limited as a sole trader, and even more so through an umbrella company (hardly any, it seems)


    I can well understand the second, as you would be an employee and they don't really have expenses in the normal run of things. But if you're working at home as a freelancer then you will have any number of expenses that you can claim for, in France but I'm 99% sure in the UK as well. Here are some:

    a proportion of your electricity bill for powering your office area
    a proportion of your rent and/or rates
    all the furniture in your office space
    all the equipment in your office space (from computers down to cables)
    all books etc
    all consumables
    all work-related software
    a percentage of your telephone bill
    a percentage of your internet connection costs
    membership fees (ProZ! and others)
    ...

    I really think you need to factor that in to the equation

    Sheila


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    Charlie Bavington  Identity Verified
    Local time: 03:08
    French to English
    Why? Sep 30, 2011

    sommerz wrote:

    I have been recently decided to take the step from in-house translating to freelancing in the UK, as my priorities with regards to flexibility and remuneration over stability have changed.

    After having spent days digging through articles, discussions and umbrella/acountancy benchmarks/terms to try and find the pros and cons that are key to me, I'm still uncertain about the following issue: How much will I be giving up in terms of net pay by choosing the services of a PAYE umbrella company instead of registering as a sole trader and have the financial admin hassle?

  • Roughly speaking, umbrella companies charge around double compared to an accountancy firms in flat fees per month. Which is reasonable, considering they take away more of the HMRC hassle and paperwork for you.

  • I'll take your word for it re: charges, but given that the main purpose of umbrella company arrangments is, I thought, to circumvent IR35, why would you consider it? Ot was it purely an admin decision as outlined? My own experience of umbrella co's is limited to a spot of computer contracting, precisely to avoid IR35. And it was some time ago

    And I still had to do my own self-assessment form at y/e. As far as I can tell, you will only be saving having to fill in the self-employment pages, and paying handsomely for it. And quite honestly, a bloke who can successfully work out NI contribs given the intracacies of LELs and whatnot probably won't find the short form self employment pages any kind of problem. You can, if you choose, when turnover is under 70k or so, enter precisely 3 figures. And the 3rd one of those is the difference between the first 2. Well within your grasp, I think

    Speaking of admin, won't your clients also have to pay the umbrella company, and not you? Not sure what impression that would create...



  • As I'll be working from home only, the expenses I can claim are fairly limited as a sole trader, and even more so through an umbrella company (hardly any, it seems).


  • Expenses, yes. Allowances - Sheila has outlined the basics. Have a look for info about allowances for a home office and similar turns of phrase. All other things being equal, this will, from your 25k gross benchmark comparison figure, reduce not only your income tax but also your NI liability.

  • The invoicing itself will be fairly simple, as I'll be supplying to one or two clients with pretty standard rates per word, quite straightforward projects, terms and conditions.

  • If one clioent, OK, I can understand the possible appeal of umbrella. As soon as you get 2, I don't. See also comment about who your client actually pays and the impression that might create.


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    Claire Cox
    United Kingdom
    Local time: 03:08
    French to English
    + ...
    Straightforward Oct 1, 2011

    I can't see any need to be anything other than a sole trader if you've already got a couple of clients. Accountancy fees are not foing to be astronomical; I send out all my own invoices (to a lot more clients) and do my own book-keeping, but my accountant does the tax calculations and submits the tax return, plus keeps me straight on what I am and am not entitled to claim. The £300 or so a year I pay her has been well worthwhile! And as Charlies says, it takes you another step away from your customer if you bring an umbrella company inot the mix....

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    sommerz
    United Kingdom
    Local time: 03:08
    English to Norwegian
    TOPIC STARTER
    Thanks a lot! Oct 1, 2011

    All of your advice and input is greatly appreciated by a newcomer. You have convinced me to register as a sole trader and scratch the umbrella (fittingly enough in this weather).

    I think the simplicity factor in umbrella company marketing fooled me a little bit, Charlie; the more I read now the more I see that the sole trader paperwork is absolutely manageable. I guess I defaulted to financial allergy there.

    You mention ProZ membership as deductable (or allowance), Sheila. But can membership fees from organisations be deducted if they're not listed here? http://www.hmrc.gov.uk/list3/index.htm (List 3: Deduction for fees and subscriptions paid to professional bodies or learned societies Deduction for fees and subscriptions paid to professional bodies or learned societies: Section 344 ITEPA 2003 (formerly Section 201 ICTA 1988))

    I've been looking into accountancies, but haven't found any with fees like yours yet, Claire. Would you care to share? Or if anyone else has good experience from certain accountancies, I'd love to hear about them.

    Thanks again for the help, guys!


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    Charlie Bavington  Identity Verified
    Local time: 03:08
    French to English
    "wholly and exclusively" Oct 1, 2011

    sommerz wrote:

    You mention ProZ membership as deductable (or allowance), Sheila. But can membership fees from organisations be deducted if they're not listed here? http://www.hmrc.gov.uk/list3/index.htm (List 3: Deduction for fees and subscriptions paid to professional bodies or learned societies Deduction for fees and subscriptions paid to professional bodies or learned societies: Section 344 ITEPA 2003 (formerly Section 201 ICTA 1988))


    Those 3 little words are the ones you need to hold dear. The basic rule is that if you shell out "wholly and exclusively" for the needs of running the business, you can claim it as a deduction. It's true that there is sometimes some debate about what w & e means, and some stuff you might think claimable isn't (business attire, for instance, unless it's PPE), but I think you could make a good case for proz subscription being paid wholly & exclusively for business purposes.

    Then you just need to find a category*. Sure, it's not one of the august bodies in your link, but at the very least being on here is (can/could/should be) a promotional/advertsiing tool. So when I was a paid member, that's where I put it. (Now under "Other", on the short form.)

    * Note, as I said, if you opt for minimum reporting, you don't actually need to categorise it - you can just declare all expenditure/allowances as one figure. Of course, if you get asked, you'll need to be able to show the individual items comprising the figure, and justify them.


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    sommerz
    United Kingdom
    Local time: 03:08
    English to Norwegian
    TOPIC STARTER
    Great advice Oct 2, 2011

    Thank you again, Charlie, I shall indeed keep those three words fresh in memory.

    The endless resources found online, both interpersonal and in databases of documents and articles, are truly invaluable when endeavouring into unknown territories.

    I very much doubt this career path would be so accessible without the evolution of the Internet.


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    Louisa Berry
    United Kingdom
    Local time: 03:08
    Member (2009)
    German to English
    + ...
    Contact HMRC about training courses Oct 2, 2011

    When i first set up as a freelancer I went to a very useful free course run by HMRC which explained how to do your tax return and went into a lot of detail about claiming expenses and capital allowances. I found it very helpful and it was only a couple of hours. I would recommend it.

    They do three different courses, see http://www.hmrc.gov.uk/bst/advice-team-events/work1.htm#2

    I attended 'Business expenses and Capital Allowances for the self-employed'.

    Newly self-employed

    HMRC cover:

    * how to register your business with HMRC
    * understanding what is meant by employment status
    * different classes of National Insurance contributions
    * basic record keeping
    * the tax return cycle, payments to HMRC and penalties
    * where to go for further help and advice

    HMRC recommend you attend this workshop first if you are new to self employment.

    Business expenses and Capital Allowances for the self-employed

    HMRC cover:

    * what allowable business expenses are and how to work out your tax allowances
    * how to recognise the most common types of allowable business expenses
    * how to identify allowable and non-allowable business expenses
    * the different ways to work out your motoring expenses
    * how to correctly work out Capital Allowances for cars, other vehicles and equipment using examples
    * where to find any further information and help you may need
    * Self Assessment Online

    HMRC recommend you attend this workshop after newly self-employed the basics unless you have experience of self employment.

    Please note: Newly self-employed - the basics and business expenses and Capital Allowances for the self-employed are not applicable to directors of limited companies.
    Self Assessment Online - for the self-employed

    HMRC cover

    * how to register for Self Assessment Online
    * how to tailor the online tax return to meet your personal requirements
    * gain an understanding of how to complete the self-employed pages of an online return
    * how to send the completed return online
    * other services that are available once you have registered for Self Assessment Online

    HMRC recommend you attend this workshop after business expenses and Capital Allowances for the self-employed.


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    sommerz
    United Kingdom
    Local time: 03:08
    English to Norwegian
    TOPIC STARTER
    Looks interesting Oct 3, 2011

    Thanks, Louisa!

    Reading about the courses, it looks like the first one ("Newly self-employed") is very basic; I think I've read up on most of that already.

    The second and third course, "Business expenses and Capital Allowances for the self-employed" and "Self Assessment Online - for the self-employed", look very interesting though – did you do all three? And if so, did the first course provide you with useful information beyond what's easily accessible in the basic overviews on the HMRC website?


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    Louisa Berry
    United Kingdom
    Local time: 03:08
    Member (2009)
    German to English
    + ...
    Business expenses and capital allowances only Oct 3, 2011

    I only took the second course, mainly because I had already been working for a year by the time I got around to taking it so I knew most things already that were covered on the first course or were able to find things out myself. However I do have a legal background including some accountancy so I already knew a reasonable amount. But from the way you were able to work out the NI rates, I would say you know a lot too! There is a lot of information on the HMRC website which is useful, I don't think theres much more in the first course, but I couldn't say for sure.

    I didn't do the third course as I didn't find the tax return that complicated and could work through the help available on the HMRC website, but the second one was useful but did include some information about tax returns.


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    sommerz
    United Kingdom
    Local time: 03:08
    English to Norwegian
    TOPIC STARTER
    2nd and 3rd it is Oct 4, 2011

    I have no background in legal matters or accountancy, but I like figuring things out when the information is fairly accessible. Just signed up for the second and third course now, thanks for the input!

    I'm sure there will be frustrations and bumps on the road ahead, but so far I must say that starting up a business in the UK is very well facilitated; both the HMRC website and the highly accessible portal http://www.businesslink.gov.uk has been of great help!


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