How To Increase
Your Income By 30%
Payrize Who We Are Our slogan is that “everyone is better off with Payrize.“ We say this because we‘re the only comparison site providing both job solutions and tax solutions to contractors and freelancers. We like to think that we can provide you with the power to compare and contrast in order to make sure that you‘re getting the best service and rates of return.
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There are a lot of choices out there, but we‘ve made it our goal here to provide as broad a range of solutions as possible. This includes, when it comes to tax solutions, the rate of return, experience within your specific sector, the time within the industry, the organisation‘s reputation for compliance and the feedback that they may receive from others who are in the same field as you.
Payrize has brought together a group of people who are international in terms of expertise, so you can be sure you‘re making as informed a decision as possible about your finances and the future ahead of you. Ray Walker (MAAT, Dip IoD) knows the business very well, having accumulated more than 10 years of experience in the fields of cross-border payroll, personally tailored tax and immigration solutions for in demand contractors. He and the rest of the team are determined to help you maximise your earnings while meeting whatever tax obligations you may have, on a worldwide basis.
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Ray‘s expertise helps us to be solid in the fields of healthcare, banking, pharmaceuticals, equipment, insurance, telecommunications, manufacturing, hi-tech and petrochemical. We aim to impress and are sure that the fast and confidential service that we provide to you will represent an exciting approach to contractor taxation.
On the flip side of that coin we can help you to hunt for those elusive but highly prized contracting jobs. We know hundreds of recruiters across a broad swath of industries and our connections, worldwide, will help us to reveal your job of choice. This is the place to come when you want to take your contracting career to the highest level.
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We don‘t believe that you should leave anything to choice when it comes to the complex subjects of taxation and job recruitment.
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Umbrella Companies - An Introduction If you‘re new to this field you may indeed be wondering what on earth an umbrella company is. There are many different ways to describe this type of organisation but in its basic form the umbrella company handles everything to do with payroll tax for contractors, while keeping a note of expenses that you may offset and handling all the record-keeping. Essentially the umbrella company is your employer as the contractor, once you‘re in a specific contract, agreed with the end client. There is usually another middleman involved in this situation as well, the recruitment agency. When the recruitment agency finds you on behalf of the employer they will usually request that you engage with an umbrella company, often times so that the agency‘s liability is reduced in the event of claims.
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What They Are When you engage with an umbrella company a lot of the “hassle“ associated with the paperwork goes away. The company will work on your behalf to ensure that all the relevant details are on file, so that things will run smoothly during the term of your contract. The contract itself together with any addenda, schedules and other documents will be held on file so that there can be no doubt when it comes to identifying who you are and what you‘re doing to government agencies and other interested parties.
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It is the umbrella company itself that will actually issue you with the contract, as remember that they are essentially employing you in this position. Your employee status allows you to conform to and get benefits from certain tax situations, as provided by the government.
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Remember that in between yourself as the employee and the actual entity for which you will be providing these services there will be one or two other entities, being the recruitment agency working on behalf of the organisation you will be working for and the umbrella company representing you. Your representative at the umbrella company will issue an invoice to the recruitment agency upon receipt of your timesheets and they will receive the payments accordingly. At that point the umbrella company will pay you as the contractor on a pay-as-you-earn (PAYE) basis, while offsetting relevant expenses to ensure that you get as much net pay as possible.
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This is where the best umbrella company will really shine. You can read elsewhere about the tax implications of working with umbrella companies in this document, but there are a variety of different business expenses that can be claimed including but not limited to accommodations, travel and meals. You can also take advantage of certain schemes provided to make your position even more tax efficient, such as quite importantly a pension allocation. If you like, you can make your charitable donations via the umbrella company and in many cases qualify for additional relief.
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When you engage with an umbrella company a lot of the “hassle“ associated with the paperwork goes away.
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Through the economies of scale the umbrella company is often able to take advantage of offers made by peripheral organisations such as insurance companies. The life insurance companies may offer special rates to employees of the umbrella and additional savings may be made available when signing up for training courses.
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If you find that you incur direct business expenditure as a result of working your job then it may be necessary to get expenses reimbursed by the client organisation they represent, or the recruitment agency. In this case the umbrella company will stand up and issue a separate invoice once they have proof from you that the expenditure has been incurred. In turn, the net payment will be passed on to you as it is received from the agency or client.
There are many other potential advantages of engaging with the umbrella company. Government bodies provide a number of statutory rights to the employee today and you can take advantage of these. For example you may qualify for maternity leave and could be eligible in certain circumstances. This is one of only many of the protections afforded by the government in your case that may be valid and enforceable; the umbrella company is best placed to advise you thereof.
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Remember that most of the time you‘re not mandated to seek out the services of an umbrella company and you can do it yourself to a certain extent. Some contractors question whether or not they should form a limited company. This is allowable but don‘t forget that there‘s quite a lot of paperwork involved with starting a company and maintaining it once you‘ve done so. You may have to register for VAT and conform to all the paperwork there. You may have to raise additional returns and deal with all the reports that the government requires. In most circumstances it‘s advisable to find a good and knowledgeable accountant to help you with all of this and you must ensure that you keep up with the recordkeeping liabilities. Many a contractor who has chosen to go it on their own as it were by forming a limited company will face a difficult time when it comes to emptying out a big box of receipts onto their desk at tax deadline time.
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There is yet a third option but it‘s really one that should be avoided by the contractor. You can deal directly with the agency or the client, but in this case it is unlikely that much of the business expenditure will be offset against tax and national insurance. You will therefore likely not be able to take home as much pay as you would have if you worked through an umbrella company versus a limited company.
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One more note that you should consider here. The dreaded IR 35 tax legislation was introduced by the Inland Revenue in 1999. This legislation was put in place to prevent tax avoidance by workers who would setup what were known as “composite“ companies and intermediaries partnerships, etc. The contractor has to be careful that they do not fall foul of this legislation, or come under the scrutiny of the Inland Revenue inspectors who may suspect that something is “amiss.“ Working with the umbrella company will ensure that you do not fall foul of the IR 35. Otherwise you may have to prove that you are a genuine and independent person and not engaged with something like a composite company purely in order to pull a fast one with the tax authorities. You cannot appear to be an employee who is pretending to be self-employed.
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Compare And Contrast The Options When it comes to umbrella companies not everyone is the same. In fact you have to be particularly careful to ensure that you choose an organisation that‘s going to look out for your interests and not fall foul of government regulators. We strongly advise you to seek help when it comes to comparing and contrasting from the many hundreds of companies that are out there.
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The strongest companies will not seek to hide anything and will be particularly open to any requests for information, or regarding the reputation of their key staff. We like to know the faces that are behind the voices and you should too.
The better companies do not treat contractors as just a “number“ but will actually provide a dedicated phone number to help you reach your representative. The last thing that you want is to have to go through a complicated telephone switching system when you need a quick answer to an important question.
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You need to be able to believe the claims made by the umbrella company as well. They are providing a vital link between you and your source of payments and you need to ensure that you‘re paid correctly and on time, every single time. This should be part of the minimum guarantee provided by the umbrella company to you.
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The best umbrella companies will be able to stand very strongly in the market place, be well insured and be able to pass on such insurance to you. How much employer‘s liability insurance coverage does your umbrella company provide? These organisations should be adequately covered by a multimillion pound liability and have indemnity protection as a minimum.
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Next, you need to get down to the nitty-gritty and see just how much you‘re going to be charged by the umbrella company for working on your behalf. These fees need to be reasonable but also very visible. You may not want to be paying a joining fee and a leaving fee and some umbrella companies will relieve you of money for doing so.
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Obviously, choose an umbrella company that‘s best suited to your specific requirements. Where are you located in relation to your umbrella company? Do you know where their offices are and where their call centre is based? Who is your specific representative or business manager? He or she must be very experienced and remember that they‘re acting to advise you, to be your accountant and tax representative.
In summary, it‘s not good enough for the organisation to claim that they are “IR 35 compliant“ and that they “guarantee“ to provide you with more take-home pay than the next solution. It is important to be able to compare and contrast here and be sure that Payrize will always go to bat for the independent contractor.
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Umbrella Companies - Why You Need To Consider Them Let‘s consider all the advantages of working with an umbrella company when you‘re an independent contractor.
1. You‘re not going it alone.
Essentially the other alternative is to form a limited company of your own. However, you probably have enough on your plate as it is trying to focus on your job at hand, and it‘s unlikely that you‘re an expert at running a limited company, or some of the many different liabilities associated. As a result, you should place additional value on your spare time by working with the umbrella company instead.
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2. Where are you going to find the accountant?
It‘s not just an accountant either. There are often many other “hats“ that you might have to wear when dealing with your own limited company affairs. Do you know what you can claim as an expense against taxation? Do you know how to complete a VAT return? Do you know where you stand when it comes to applying for a mortgage and the tax implications associated with that?
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There are often many other “hats“ that you might have to wear when dealing with your own limited company affairs. Do you know what you can claim as an expense against taxation?
3. You may be “in between“ career opportunities.
If you‘re not sure how long you‘re going to be working as a contractor in this field due to particular circumstances then it‘s not advisable for you to consider going it alone when it comes to handling all your affairs. It costs money to set up a limited company after all and is it really worthwhile when it would be far easier to deal with the umbrella company for the actual length of your contract, however short or long it might be?
4. Will you be up to date?
If you‘re a limited company then you don‘t have to “balance“ your tax affairs until the end of the financial year. You may well have a tax bill to settle at that time. Compare this to the umbrella company, where your payroll is handled as PAYE. In this way, you‘re always up-to-date and have a clear picture of your situation. Do you really want that additional headache at the end of the financial year?
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5. What insurance do I need?
This is a question that you‘re going to have to ask yourself if you set up your own limited company. There may be a number of different professional insurances that are applicable in your case. Even after you have identified what these insurance coverages may be, it‘s never easy to simply “get coverage.“ In fact, we‘ve heard of a number of horror stories of contractors that are unable to get the coverage that they may need, while umbrella companies have the advantage of size and a certain amount of “clout“ in the market.
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6. Am I IR35 compliant?
First of all you will need to educate yourself about exactly what IR35 legislation is. Once again you may need the services of a professional accountant to advise you whether or not you‘re in compliance before you go ahead with your contract. In this case once again it‘s far better to work with an umbrella company, as they will be IR 35 compliant before you start.
In the ma jority of cases it‘s advisable for the independent contractor to engage with an umbrella company, although it is nevertheless very important to ensure that you engage with the “right“ one. Payrize knows what to look for and has expertise across a very broad swath of industries.
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Contractor Jobs Perhaps you feel more comfortable working in a contractor situation, maybe your hand is been forced to some extent due to economic circumstances, or perhaps your industry is focusing more on this type of position. Whatever circumstances apply to you now, this may be the perfect time to be looking for contractor jobs in your particular sphere. Here, we specialise in matching the correct contractors to the ideal contracting jobs.
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We make sure that we understand you and your requirements and know that we have a great deal of contacts across many diverse industries. For more than 10 years now we have built up a large variety of links and connections with recruiters and employers in so many different industries. And, as we have been active in seeking contractor tax solutions this has put us in touch with many different people on both sides of the equation, in all these diverse industries.
We have contacts in the security, pharmaceuticals, telecommunications, healthcare, information technology, banking and many other industries and we‘re confident that we can find the right position for your next contract.
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Looking For Jobs If you‘re looking for a new contractor job opportunity, what do you need to bear in mind before you start?
Firstly, you should consider what opportunities are available in your industry. Know that industry very well before you start. How have things panned out during the economic downturn to reshape the look of the business? Are more companies outsourcing these days? Be realistic when assessing the state of play in the market, as this will also enable you to value your services accordingly.
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Prepare yourself for the process and put a realistic amount of time into the equation. You may be lucky to find something within a reasonably short space of time, but you should ensure that you have the funds available to get by if you‘re in between jobs right now.
It is certainly possible to look for jobs by yourself, but it‘s highly advised to seek the assistance of those who are constantly active in the field. Organisations such as ourselves have our finger on the pulse and may well be aware of opportunities that are not yet advertised or publicised.
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How To Land A Dream Contractor Job Figure out what it takes to succeed in your profession as a contractor. In addition to your personal skills, what professional certifications may be necessary? Will it be necessary to undergo additional training, or to achieve such certifications before you proceed? It may well be that a certain amount of additional training will augment your value and marketability and take you, potentially, to the next level in terms of earnings.
Know your industry inside out. It helps to keep your finger on the pulse even when you‘re not currently employed, so that you‘re aware of any specific wants and needs as they develop. If you know others who are currently “ inside“ that industry quiz them about the latest “buzz“ words, projects or situations and make sure that you‘re completely up-todate accordingly. In this way you‘ll be speaking the correct language during the entire application process. This shows not only your value, but also that you‘re actively engaged in the potential success of the employer.
Once you have all your ducks in a row in this way, you‘ll be able to prepare yourself in marketing terms to land that dream job.
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Marketing Yourself Consider yourself as “a brand.“ This may be marketing jargon, but it‘s increasingly important when you‘re applying for any job, be it a contracting job or otherwise. You may have had a lengthy career in your chosen, active field and you should of course gather together the relevant data to illustrate this to the potential employer. Remember “relevance.“ Not all of your previous experience in this field may be relevant right now and be ready to focus on just what is. Likewise, experience in other industries not necessarily connected could be relevant in itself.
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It helps to compose a mission statement at the beginning. Within this mission statement you make a positive affirmation to yourself detailing exactly what you‘re looking for, why you‘re looking for it and why you‘re the ideal person for the position. Make this mission statement as specific as possible while focusing on each and every essential element. This mission statement will also help you to compose your CV as you prepare.
How active are you on social media? While some people think of this still as a purely leisure activity you should know that an active, purposeful and controlled presence on certain social media sites can only be of benefit to you here. Many employers are now turning to these sites to find out more information about you. Like it or not, there‘s already likely to be quite a lot of information available through search engines such as Google, or through some of those top-tier social media sites you may be a member of.
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LinkedIn is going to be one of your primary focuses here. As you prepare to write your CV make sure that it will match your social profile. Background information should match up, as should the dates that you mentioned. Employers do understand that sites such as Facebook are social tools and that there will be a lot of information related to leisure activities, family and friends and so on. It goes without saying that there should be very little, if any, controversial material herein. It may go without saying, but it‘s amazing just how many people have had their career aspirations affected due to certain posts, photographs, videos or comments.
It‘s also a good idea to join the online groups that are targeted to your industry or profession. You can find these through LinkedIn, Yahoo or Facebook. If there are a good number of members in the group you can pick up on current topics of interest and discuss ideas and ask questions. You never know, you may become aware of certain opportunities simply by being active in these groups. Remember that the more information you have and the more “intelligence“ you pick up, the more value you‘re going to add in this entire process.
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Your CV, Its Importance Your CV is going to be your shop window to the world. It‘s something that you should spend a good deal of time on and be sure before you distribute it that you‘re absolutely happy for any potential employer to see it. It‘s going to be your personal sales pitch. In certain industries it‘s going to be even more important than normal. If you‘re going to be in a highly communicative field then the employer is going to scrutinise your CV as an indication of how you‘re likely to perform on the job.
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Your CV should not be something that necessarily just sits in your filing cabinet at home and is distributed at the moment you‘re looking for a position. There are many databases available today and screening technology allows recruiters to search for and find potential candidates even in advance of the position being advertised. You need to place as much value on yourself as possible and always be looking down the road. As a contractor, your position isn‘t necessarily going to last very long with your current employer and you shouldn‘t leave it until you‘ve been made aware of the termination date before you start to crank up your marketing machine again.
The CV must be complete, accurate, honest and well presented. You must highlight the particular skills, experience or business acumen that the employer is seeking and that you have acquired. While a CV that‘s placed on a recruitment database may be somewhat generalised and focused on areas that you believe are of most value across the industry, the CV that‘s being prepared for a specific employer can afford to be tailored accordingly.
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How To Write A First Class CV When you write your CV you‘re going for maximum impact in a relatively short amount of time. You have to make sure that your heavy ammunition is deployed in the first few paragraphs. Recruiters often speed read and may not get to the “nitty-gritty“ of your CV unless the opening paragraphs really grab them.
Don‘t make this too long-winded, either. Ideally it should cover no more than two sides of a standard piece of paper. Make sure that it reads as well in digital format as it does on paper. Avoid using a particularly fancy font and / or different colours just because you think it looks “nicer.“ It‘s likely that they‘ll just be a distraction. If you‘re not sure, turn to some professional CV compilation sites online and see how they do it. Use bulleted or bolded text sparingly and just to highlight different sections of your CV.
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Relevant personal details should be included at the beginning, with your contact number very easy to find. You don‘t need to go into too much personal detail, other than to confirm your nationality and your eligibility to work in the country where you would be based.
Highlight your professional and business qualifications, as well as your academic qualifications. Once again ensure that you only include relevant details here. It‘s not necessary to go back all the way to your early childhood to detail your junior academia.
When it comes to work experience list this in reverse order with your most recent experiences first. You will need to include the name of the organisation, the job that you did there, the dates, your achievements and the level at which you operated. In other words, with whom were you engaged on a regular basis, especially if this is appropriate to your field or intended position. It may be necessary to include the size of a team that you were responsible for supervising and possibly the size of the budget you were responsible for maintaining.
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Highlight your ma jor achievements, whatever made you highly valuable to that organisation. What did you do “outside of the box“ that was particularly successful? The employer may not be looking for someone who simply fits in, but somebody who‘s a self-starter, motivated and more likely to contribute way beyond initial expectations for additional value.
In our electronic age, remember that when you post something online recruiters are going to be using certain keywords. Make sure that you make a list of relevant and appropriate keywords and include them within the text.
Finally, there‘s nothing wrong with showing the recruiter that you‘re a human being by referring to what you might do during your leisure time. These elements are not going to land you a job but they may give the recruiter an idea of what kind of person you‘re likely to be within the team. In certain circumstances a hobby can paint a much broader picture of who you are as a person.
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Contractor Tax Overview We‘re not going to be giving away any secrets if we tell you that contractor tax is quite complicated. A lot will depend on the route you choose to take. If you decide to work with an umbrella company a lot of intricate details will be handled for you by this organisation. You can decide to set up your own limited company, which will enable you to manage your tax liabilities quite well but does require a lot more engagement on your side, or perhaps additional expenditure in terms of sourcing a good accountant. A third option is to work directly with the recruitment agency or the client. They will handle your tax situation before paying you, but you won‘t be able to take as much advantage of allowable expenditure as you would have otherwise.
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With a limited company you will be liable to pay corporation tax on profits as well. This is generally set at 20%. You‘ll also have to pay employers national insurance contributions on any salary that you pay yourself from within that limited company. You may well have to register for value added tax (VAT) which is currently 20%. Then of course you‘ll have to pay income tax which starts at 20% and goes up to 50%. National insurance contributions are currently 12% within two thresholds, lowering to 2% for income made above £817 per week.
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As far as reporting and paying these taxes are concerned there are different requirements again. Corporation tax is payable nine months after the year end. VAT and your pay as you earn and national insurance contributions are payable quarterly in terms of the company‘s liability. You will have to make a self-assessment of your personal tax at the beginning of each year and lodge payments “on account“ in January and July of each year; everything is reconciled with your end of year accounts.
As we said it can be complicated, and a good reason for you to hire an accountant - or better still, to consider working with an umbrella company in the beginning.
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How To Find Contractor Tax Solutions Due to the volatility surrounding the tax code and the worry of having to deal with fees and penalties, many contractors choose to find an appropriate tax solution before they go ahead. You don‘t want to be worrying about deadlines and whether or not you‘ve done things correctly if you‘re the type of person to do it all yourself within the confines of a limited company. You may be concerned about whether you‘ve found the right accountant, or to be further concerned that your expenditure is greater than it should be when it comes to these service providers.
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There are a number of ways to find contractor tax solutions, but how can you be sure that you‘re engaging with the right organisation? In this case it‘s best to work with an organisation such as ourselves. We have made it our business to compare and contrast the tax solution providers. We will only suggest to you the organisation we feel is a perfect fit in your particular situation.
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Comparing And Contrasting Tax Solutions When it comes to comparing and contrasting tax solution providers, here are some of the things that you should be looking for:
• Does the company have a good knowledge of your industry and the legislation that may apply to it within the region you‘ll be working? • Do you feel confident that the solution is always fully compliant with legislation in that country?
• What kind of reputation does the organisation have? • In terms of the solutions offered by the company, do you feel that the information provided is easy to understand and that it‘s laid out in sufficient detail for you to make a decision with all due care? • What type of fees does the organisation propose?
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• In terms of administrative and management fees, are they looking for more than you feel comfortable with? • It‘s important to get a good feeling for how the organisation will interact with you on a regular basis. In other words, how will your manager interact? • Is the customer service provided at least adequate, and ideally on a proactive basis?
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We‘ve gathered a lot of information from people just like you, within your particular industry over the years. This type of feedback helps us to decide who we should suggest as your ideal partner, moving forward. There are a large number of options and not all of them are a perfect choice for you. It can be difficult for you to sort through all this information by yourself and this is precisely why we‘ve set up this specialised comparison site.
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Taxes The old saying goes that there are only two things in life that are guaranteed, and they‘re death and taxes. Most of us know only too well how the government‘s tax bite can eat into your take-home pay. While we all understand how important the tax system is in fundamental terms, we also know that it‘s a very complicated area. Few of us really understand how it works and this is why it‘s so important to prove that we‘re in accordance.
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Seek professional help and advice whenever you‘re dealing with your own taxes. For the contractor there are several choices. If you choose to set up a limited company to handle your affairs then you‘ll have to deal with all your taxes yourself or employ the services of a tax accountant. If you choose to work directly with the recruitment agency or the client then you won‘t have to “do“ your taxes, as they will be handled by the agency or client, but you will nevertheless lose the rights to certain deductions which you would otherwise have been able to claim. If you choose to work with an umbrella company then this operation will handle your taxes for you, as well as calculating and applying those legitimate business deductions.
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Either way, however, it‘s a good idea to have a broad knowledge of your rights as a taxpayer within the limits of the law. We will investigate here the difference between tax avoidance and tax evasion and give you some pointers to help you make some more informed decisions about your tax affairs. Make no mistake. There can be a huge difference in the amount of money that you take home on a yearly basis between what you should retain and what you could have retained, unless you take care of your tax affairs carefully. There are also a lot of grey areas and even the best tax accountants often have difficulty understanding the intricacies. Ensure that you do not fall foul of the regulators. Some bad decisions made using out-of-date or misunderstood information can lead to serious problems that quickly accumulate and get worse with time.
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How Much Should You Pay? Each individual‘s circumstances are different and therefore it‘s difficult to say exactly how much any individual should pay from a tax perspective, but we can take a look at the fundamentals to give you a broad idea. If you‘re just moving into the contractor field then the chances are that you will have been employed by an organisation that has handled your tax affairs before. If you were working for another company full time then this organisation will likely have deducted taxes for you on a pay-as-you-earn basis. These deductions combined with your national insurance contributions would have been reconciled at year end. When you become a contractor however you have additional responsibilities.
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When you set up a limited company, in addition to the PAYE and national insurance tax deductions you‘ll also have to consider corporation tax and tax payable on dividends. Always ensure that your status is clearcut and that your contracts do not appear to be governed by the new IR 35 legislation introduced by the government, which seeks to clarify the role of intermediaries. The lawmakers are trying to ensure that employees don‘t try and portray themselves as independent contractors when they are truly employed.
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Limited companies pay corporation tax on the profits, which is the money that‘s left over once legitimate business expenditure has been calculated. Legitimate expenditures here include the salary that you would pay to yourself. You pay corporation tax once per year, usually at the end of your company‘s trading or financial year. While the rates do vary, a good figure to bear in mind here is the 20% rate that applies to a ma jority.
When it comes to paying yourself as an independent contractor through a limited company, many choose to split this into a mix of dividends and salary payments. A certain amount of salary payment can be classified as tax-free and subcontractors may choose to pay only this amount as a salary and the remainder as a dividend to themselves, as the shareholder.
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The dividends are taxed at a lower rate than that of the income and also don‘t incur those national insurance contributions. Any dividend that you paid to yourself must only be applied after the corporation tax has been paid, that‘s from post tax profits.
Your income tax is calculated on your gross salary after deductions. As we have said, many contractors choose to pay themselves a very low salary, which keeps the income tax and national insurance contributions to the legal minimum. Note that the corporation pays its own contribution to your national insurance account as well. The money that you deduct against income tax and national insurance has to be sent to the government on a monthly basis unless it‘s very low, and in such cases you can generally send it in quarterly.
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There is yet another form of tax to consider here and that‘s VAT. There are volumes of laws covering the valueadded tax system as well. You can choose to register for VAT voluntarily if you don‘t automatically pass the threshold where you must register anyway. You might ask why you should register voluntarily? This would enable you to recover any VAT that you pay out when you buy things for your business, such as that new computer or any associated accounting fees. Consider this carefully as you‘ll have an additional paperwork burden and have to send in quarterly VAT returns if this isn‘t handled for you by a professional.
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Note that in 2002 the UK government introduced a Flat Rate VAT scheme. Depending on your turnover and expenses this can be beneficial. This may work best for individuals who have few real expenses to claim compared to the fee income. Here you pay the VAT as a percentage of your turnover rather than as the difference between sales and purchases. The advantage would be that you can continue to charge the client the 20% VAT rate, but you‘ll hand over a smaller percentage to the Chancellor of the Exchequer. As an example, if you‘re an IT contractor your rate is 14.5%.
Tax Avoidance There‘s no doubt about it, tax avoidance can be a somewhat sensitive subject to discuss. There has been a lot of activity in the media recently, where lots of “moral outrage“ has been raised and levelled at certain high profile companies and individuals accused of avoiding tax. Yet, let‘s just be clear about that - they are charged with avoiding tax and not evading tax and there‘s a huge difference here.
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Fundamentally, tax avoidance is perfectly legal while tax evasion is illegal. Why, therefore, should there be such a public outcry when it comes to these individuals and corporations who are said to be avoiding lots of tax? Much of this discussion comes about because there are a lot of misunderstandings and many people do classify “avoidance“ as some kind of “evasion.“ There‘s nothing legally wrong with avoiding the payment of taxes that you‘re not obligated to pay.
Unfortunately, high-profile individuals and corporations are always likely to be criticised for one thing or another anyway. You, as an independent contractor are probably not going to fall into that kind of spotlight. Therefore, you might not have to defend yourself on some kind of moral basis and can look at tax avoidance clearly and without emotion. There are good reasons to practice legal tax avoidance. Let‘s have a look at them...
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Why You Should Avoid Taxes We have already said that taxes take a significant bite out of your takehome pay. Many contractors find that a good slice of their income is taxed at the rate of 40%. If you are ambitious, as we should all be, then it does not take too long in all honesty before you get into the higher rates of tax. If you could legally avoid tax then you could drastically increase the financial value of your job and have a lot more money to spend on things that you want to spend on, rather than it going into the coffers of the government. 59
What‘s the Difference Between Avoidance And Evasion? Let‘s be quite clear about the difference between avoidance and evasion. Evasion, in almost every country in the world, is a serious criminal offence. It refers to an effort to evade paying tax, even though you‘re liable to pay it. In some situations there can be a rather thin line between legality and illegality, but nevertheless there is a line. It‘s important to seek professional advice and never to guess, let alone make a concerted effort to evade.
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You can reduce your taxes legally by making an effort to strategically plan your expenditure. Did you know that the UK tax law guide runs to almost 10,500 pages over five volumes? Some people would say that it‘s also written in what most would consider to be less-than-plainEnglish. It seems that the government is adding to this verbose document on a regular basis, as new laws are introduced to try and stamp out loopholes and grey areas.
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There‘s no doubt that the payment of tax is a very unpopular subject. When people consider even for a moment that they‘re paying too much or that others aren‘t paying enough, anything to do with avoidance becomes ripe for controversy.
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How To Avoid Paying Too Much Tax In addition to making sure that you‘re taking advantage of all the tax laws and ensuring that you‘re including all your deductions appropriately, there are some interesting ways to avoid paying too much tax as a contractor.
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For example, offshore accounts or remuneration trusts. The remuneration trust is basically an offshore business that will take care of somebody‘s services without falling under the jurisdiction of UK tax laws, nor breaking any of them either. How does this work? Fundamentally, because the remuneration trust is not based within the geographical definition of the UK mainland, it doesn‘t fall under the auspices of the United Kingdom tax laws.
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Remuneration trusts and offshore accounts are available to individuals or corporations that have annual earnings greater than ÂŁ100,000. Even though they will charge you a fee for handling the situation the amount charged does pale into insignificance compared to the potential tax savings to you.
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You might choose to set up an offshore pension. This is intended to provide a taxfree inheritance to your heirs. You should note that any loans that are applied against this pension are exempt from any taxation. You might also find some flexibility when it comes to investments; this could be very handy when it comes to the purchase of a new home. To take advantage of this scheme your pension needs to be set at a minimum of ÂŁ300,000.
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Consider carefully how to plan your finances when working out how much to charge the client. For example, you may choose to bring this below a certain threshold if it means that you can avoid paying the highest tax rates. Also, it is possible to give some money to registered charities, once again to bring your tax rate down somewhat. Perhaps you could set up a company with your significant other, your husband, wife or civil partner. In this case you may be able to split the income so that collectively, you‘ll fall below that higher tax rate.
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Most people would agree that there are sizeable potential consequences associated with crossing the “thin line,“ therefore it‘s highly advisable to seek the advice and services of an experienced tax accountant. Just remember that there‘s nothing wrong with taking full advantage of what‘s legally available to you and retaining as much of your hard earned income as possible.
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What Are The Consequences Of Tax Evasion? When you consider some of the consequences associated with tax evasion you‘ll understand why it‘s so important to get professional help to ensure that you‘re doing things properly. There again, there are significant differences associated with a blatant attempt to evade tax and one that has been committed through genuine error or misunderstanding. This is not to say that an error or misunderstanding would relieve you of any obligations and liabilities, but if you‘re found to have blatantly and knowingly evaded tax you can face the prospect of huge fines, forced bankruptcy and even time in jail.
Furthermore, when you‘re convicted of dodging tax you‘ll be expected to pay the amount due together with interest which is normally set at very punitive rates. You will also be adjudged a fine that can be 200% of the tax that‘s due. You should also note that time isn‘t your friend here. The government can go back up to 20 years. It‘s actually quite usual for tax inspectors to conduct a very comprehensive analysis of all your affairs, should any form of tax evasion be suspected.
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There are a large number of tax solutions available to you. We specialise in providing a tool to help you make this decision. Ensure that you don‘t go it alone or make any mistakes, however small, as you start out on your role as a contractor. Even those who are experienced as independent contractors need to keep up-to-date with constantly changing laws that are emerging. It is therefore a good idea to ensure that you constantly monitor your situation and the providers you work with to make sure that you‘ve the best tax solution options available to you.
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Tax Havens Explained As an independent contractor should you be interested in the existence of tax havens at all? You may know little or nothing about them, but in the interest of managing your tax affairs as efficiently as possible we believe that it‘s important to provide you with as much information as possible.
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There are quite a large number of jurisdictions around the world that are identified as tax havens and there has been quite a lot of “mixed“ media coverage relating to their existence, what they do and what they don‘t do. Various governments of countries that have traditionally levied rather higher tax rates on individuals and corporations seem to be constantly doing battle with these tax havens, in an attempt to get more information about exactly what they do - or more specifically, who they do it for.
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Tax Havens What They Are Essentially, a tax haven is a location where taxes are either not levied or are levied at a lower rate, sometimes substantially so. Corporations and individuals are able to establish a presence in these jurisdictions. In “The Economist,“ we can see a definition of tax havens thus. “What identifies an area as a tax haven is the existence of a competent tax structure established deliberately to take advantage of and exploit a worldwide demand for opportunities to engage in tax avoidance.“ We need to remember at this point that there‘s a significant difference between the term “tax avoidance“ and “tax evasion.“ The latter indicates illegal activity in an attempt to get out of paying taxes, but we‘re concerned here with tax avoidance, which is a perfectly legal attempt to reduce or minimise the amount of tax that you‘re obliged to pay to the government.
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Tax havens usually promote themselves as a location for non-residents to reduce their tax obligations. Whenever a tax haven is a sovereign nation it has no obligation to report any information to the government of another nation. In fact, these tax havens usually have specific laws and administrative programmes written to ensure strict secrecy and to avoid any scrutiny by tax authorities elsewhere. Thus, it‘s the law of the land in many cases that information about taxpayers benefiting from the low tax at the jurisdiction cannot be exchanged with other governments. Note however that this is not an exclusive consideration when determining whether or not a location is a tax haven. In fact, nations such as the USA and the UK could also under certain circumstances be classified as tax havens, where certain programmes or schemes are put in place by governments, national or local, in an attempt to attract investment money.
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Some of the advantages of tax havens include personal residency. Where the individual is actually living in the country they automatically qualify for the tax laws of that jurisdiction. This is not only an advantage when it comes to income tax, but also capital gains and inheritance.
A trust company can be established in the tax haven, holding assets or investments under management. The assets themselves become a legal entity and are not resident in the original jurisdiction which may be a high tax jurisdiction.
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Life insurance and pension funds and other banking activities are principally found in tax havens. In particular the management of offshore funds in tax havens enables financial service providers to provide their products at very favourable levels of taxation.
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There are many reasons why a jurisdiction should decide to become a tax haven. Some of these reasons are very favourable. For example, due to the carrot of significant income opportunities they find that it‘s a lot easier for them to balance their books, especially in smaller countries where there may be no significant industrial base, or obvious means for them to raise revenues to pay for their budgets. Other countries such as Ireland have a very favourable corporate tax rate and these locations are very attractive to larger corporations, who will locate a division of the parent company in that tax haven. Not only does the host country get the tax revenue from the corporation but the company will employ workers from the local population, with significant added benefit. There have been some much publicised cases in the media recently in relation to household name companies establishing themselves in Ireland and other countries and thus avoiding what they consider to be punitive rates of tax in the United States.
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It‘s very important to understand the implications involved with the use of tax havens. You need to precisely understand what requirements are levied by the tax havens and what solutions are available before you can find a solution that‘s going to be not only effective, but safe for you. Look at all this in the light of your own country‘s rules and regulations so that you go into every arrangement with your eyes wide open.
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There‘s no doubt that using offshore tax havens can be a great way to avoid paying any more tax than you need to. Don‘t be frightened by the negative press that you often read in the media in relation to these tax havens, as if you were doing something immoral by even considering the situation. When you do this correctly you‘re engaging a very powerful financial option and helping to maximise your income and wealth.
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You should be in a position to freely choose how your money is managed, but nevertheless ensure that you get the best advice possible when you‘re in the process of selection. At Payrize we have financial specialists who fully comprehend the tax laws and are up-to-date with the requirements for each particular tax haven you might consider. It‘s our goal to ensure that you remain in compliance, safe and fully legal in your dealings here.
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Comparing Key Tax Havens Around The World Let‘s have a look at some of the key tax havens around the world, to compare what they offer.
The British Virgin Islands is apparently the domicile for more than 40% of the world‘s offshore companies and this would make it the largest such jurisdiction, not perhaps by volume but by the number of managed corporations anyway.
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In the UK Channel Islands nonresidents do not pay any tax on their “local income.“ Individuals or corporations do not pay any tax based on foreign income or gains.
The Isle Of Man has no corporate tax, inheritance, or capital gains taxation. If you‘re resident in the Isle of Man your personal income tax rate is capped at 18% and the maximum amount of tax liability you can be expected to pay is £100,000.
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Perhaps the most well recognised tax haven is the Cayman Islands. Banks with household names from all over the world are located in the Caymans. This Caribbean nation has modern facilities and infrastructure and offers a very broad range of banking solutions for local and non-resident clients.
In Bermuda income tax on foreign earnings is not charged and overseas companies can be exempt.
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Offshore Accounts Something You Should Consider, Or Not? In this age of uncertainty it can be a very good idea to diversify. It can be a good idea to consider the establishment of an offshore account purely from the point of view of safety. It can be scary to realise that a given government has the means of freezing bank accounts and assets without too much notification or solid reasoning and it can take quite an effort on your part to sort all this out should it happen.
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Quite apart from that you can find that offshore interest rates are much better than domestic. Many of the premier banks will offer offshore accounts to you. In addition, some international banks will be willing to open an offshore account for you in their foreign branch, sometimes without the need for you to actually visit that country itself in order to do so. Normally, there‘s a minimum amount of money required before you can establish the account and you usually have to maintain that balance throughout. For example, you would be required to lodge and maintain ÂŁ5000 in certain situations.
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Remember that your offshore income may not be subject to tax, depending on your country of domicile or residence. Often, you will find that the banking services provided are more attractive than some of the services provided by your local or high street bank. Fundamentally, though, you will enjoy significant levels of privacy. 86
Tax Solution Providers For Contractors As a contractor you need to understand what type of solutions are available to you. You can opt to set up a limited company and employ yourself, as well as being a shareholder. You can take advantage of an umbrella organisation that will handle all taxation for you.
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There are a number of tax solution providers in the market, in fact there‘s a wide array of them and this can sometimes be confusing. All you need to do is a simple Internet search and you‘ll come up with pages of potential solutions, most of which claim to be the best.
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Should you spend your time reading through all these Web pages, or getting in touch with these organisations in an attempt to compare and contrast on your own?
We contend that it‘s a far more efficient use of your time to deal with an organisation such as Payrize, to provide you with the contrasting information so you can make a much more informed decision.
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Understanding Tax Solution Provider Services And Fees Just as there are a wide array of tax solution providers in the marketplace, so there can be an equally confusing array of services and associated fees charged by these individual companies. As mentioned earlier, some organisations will charge a joining fee and a leaving fee, in addition to the charges for processing your account on a regular basis.
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Generally speaking, you‘ll be charged on a weekly or monthly basis. It‘s important to understand exactly what the fees cover and what they don‘t cover. You can be quoted an “inclusive“ fee, but does this actually cover the creation of tax forms, the handling of insurance, or processing of expenses? If in your case there won‘t be a large number of expenses then should you be paying the same flat rate that‘s normally applicable to those who actually do have a large number of expenses?
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On the other end of the spectrum, you should be asking for more information when a solution advertises its services as “free.“ Could it be that the organisation is using other means to get its margins, such as taking advantage of the spread in the flat rate VAT scheme? If so, you should certainly be aware of this.
It‘s also not uncommon to find that providers deal with some kind of fee or commission for new business by negotiating directly with an agency or client.
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The Importance Of The Provider‘s Knowledge Base And Contact Spread For tax solution providers to be of maximum benefit to you they really need to understand the law and have experience in dealing with its intricacies. Many providers have sprung up in recent years to try and take advantage of the increased number of contractors looking to change their status. Some of these tax solution providers will suggest that they have experienced and knowledgeable staff members in order to be of interest to you. It‘s a good idea to seek testimonials to at least indicate experience, good service and reputation. You don‘t want to be part of that organisation‘s learning curve, necessarily.
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There‘s no substitute for experience, or for a widespread contact base. When you‘re looking for advice in relation to which one you should choose, then your advisor is much more likely to be able to help you if he or she truly understands who the ma jor players are in the market and what they can do for you, in your particular case.
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At Payrize we go out of our way to solicit as much information as possible on a regular basis from contractors such as you, in order for us to augment and develop our database.
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We want to know what the tax solution provider can bring to the table. For example, what‘s their reputation or pedigree? How long have they been in the industry? What‘s their rate of return? Do they have any special offers that could be of interest to you? Do they have experience in your particular work sector? How compliant are they when it comes to the allimportant task of dealing directly with the government and regulators?
Here, we have a team of international tax experts who know the industry inside out. Not only do they know the tax industry but they‘re familiar with the diverse industries of interest to the contractor. The amount of knowledge that we have been able to accumulate and the spread of contacts from within these industries and tax sectors gives us a significant head start here. It‘s our aim to ensure that we give you as much information as possible so that you can make the most informed decision possible about the way you‘re heading.
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Summary Understanding The World Of The Contractor Making the decision to set yourself up as an independent contractor can be one of the biggest decisions you make in your life. Circumstances may dictate that this is the road you need to follow, but it can be quite a scary proposition when you‘ve been used to working for others directly. You may not be used to taking such a “hands-on“ approach to your contracts and tax affairs.
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You need to have two primary areas of focus. First of all you need to ensure that you get an enjoyable, fulfilling and rewarding job. You need to work with an organisation that keeps its finger on the pulse in your specific industry, to get the feedback you need and information necessary to choose a job. Secondly, you need to ensure that you‘re fully legal and compliant, in terms of your status and your tax affairs. This is not a simple situation to understand and we have outlined how the government is trying to crack down on people who are effectively employees trying to treat themselves as self-employed for tax reasons.
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Hopefully you‘ll now have a clear understanding of the options available to you. Whether you set yourself up as an employee of a limited company that you form, deal directly with a recruitment agency or a client, or seek to engage with an umbrella company or tax solution provider, you should know that we will be on your side and prepared to advise you, at every step of the journey.
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We believe that providing a comparison service is the right way to bring value to you in this marketplace. Understanding your tax situation can be the biggest hurdle of all. What if you were able to retain as much as an additional 30% of your net income? By comparing and contrasting contractor tax solutions we can uncover some options that you may not be aware of, or have not even considered. 100
Perhaps you weren‘t aware that there was a tax solution provider service available to you, or maybe you‘ve been worried that you might choose an individual tax solution provider without first being aware of what you may consider to be potentially better options. Furthermore, we understand that your circumstances may change from time to time, as may your goals. Our flexibility allows you to move with the times and we‘re confident that we can provide you with the helping hand that you need throughout your lifetime as a contractor.
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