Working in construction is rewarding and profitable. That’s great until it’s time to sit down and do your taxes. Luckily for contractors, there are a few options to consider when paying your taxes that could make your life considerably easier. Let’s take a look.
What is PAYE?
PAYE stands for Pay As You Earn. It refers to a method of paying income tax and national insurance contributions where your employers deduct your taxes directly from your wages or occupational pension. This includes money you earn from working, sick pay, maternity/paternity leave, and adoption pay.
For umbrella companies, this means the third party acting as your employer provides a PAYE payroll service so you don’t have to worry about your finances as a sole trader would.
What is CIS?
CIS stands for Construction Industry Scheme. It relates to self-employed, limited companies, and LLPs. This is a scheme with specific rules set out by the government aimed at contractors and subcontractors. This was set up to reduce tax avoidance in the construction industry. With CIS, subcontractors deduct money from their payments which are sent straight to HMRC by the contractor. These deductions of 20% work as an advanced payment towards the subcontractor’s tax and national insurance payment.
What are the main differences between PAYE and CIS umbrellas?
Both schemes have noticeable similarities. However, there are some critical differences between the schemes.
The main difference between CIS and PAYE is that with CIS you will hand over a fixed amount of 20% to HMRC instead of the calculated ‘correct’ amount of tax that you would pay through PAYE. PAYE uses a tax code to determine the amount you need to pay back.
With CIS, you can claim back certain expenses at the end of the year. You can’t do this with PAYE unless you overpaid on tax throughout the year. Also, with CIS, there’s no income tax to pay at the end of the year as it has already been paid.
However, with CIS, you can apply for gross payment status instead where you choose to pay the same amount as you would monthly, but in one bulk payment at the end of the year. Under a CIS umbrella company, you’ll be paid for all your work possibly through a self-billing arrangement.
To take care of your finance registers under CIS as a subcontractor, you’re responsible for deducting the tax you owe and allowing the contractors to send it to HMRC on your behalf. With PAYE this process is automatic.
Tax deductions made on behalf of employees should be made to HMRC monthly as long as the combined income tax and national insurance liability of all employees are £1500 or more. But, umbrella companies will retain enough money to cover the cost of the accounting.
If you’re in need of an accountant for your umbrella company or limited company, get in touch with One Click Group on 01928 232 155.