Computer Aided Design Contracting Tax Concerns In The UK
Contracting as a Computer Aided Design engineer in the UK can be very lucrative. There are many ways in which you can maximise the income you receive.
Many contractors choose to find work through agencies. Agencies generally charge a finders fee (to the client) and also take a cut of the rate paid to the contractor. This is often 10-20% of the contractors rate. Agencies do provide some services for this cost, however many contractors find that they do not require these services. If the contract lasts for several years, the cost to the contractor can be many thousands of pounds. Because of this, it can be advisable to approach companies personally and avoid the use of agencies.
Employment and tax laws in the UK are not very friendly towards CAD contractors. There are different mechanisms available to maximise your income. There are (generally) three methods of working as a CAD contractor in the UK; as a Pay As You Earn (PAYE) contractor, as a an employee of an 'umbrella' company, or as a Director of a UK limited company.
Working as PAYE you will generally earn the least of the three, as you pay tax and national insurance as if you were an employee of your client. This is expensive, as some of your income is liable to be chargeable at 'supertax' rates.
Working as an employee of an umbrella company has advantages and costs. Contractors usually pay a monthly fee to be a member of an umbrella company, this fee can often be more expensive than the fees an accountant would charge for a limited company. Also, umbrella companies do not offer flat rate VAT schemes, which means that a contractors earnings will be around 6% less. Umbrella companies are usually less flexible than limited companies with regard to expenses claims for items such as equipment, services such as training and overheads like travel and subsistence. The advantages come through the hassle free way that umbrella companies work. They generally require no more than a timesheet to be submitted weekly, and work out and pay all your tax and national insurance contributions before depositing the remainder into your bank account. Umbrella companies also spread the cost of expenses such as professional indemnity insurance and (tax) investigation insurance.
The one real advantage of having your own limited company comes through the flat-rate VAT scheme. Most contractors will only have to pass the Inland Revenue 11% of the 17.5% VAT collected from their clients. The effective result is a 6.5% pay rise!
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