PAYE Payment Solutions
So, what is the PAYE system?
If you’re an employee, your employer will regularly deduct from your income a sum for income tax and a sum for National Insurance Contributions. These are then sent directly to HMRC. Essentially, Pay As You Earn or PAYE is a method of spreading employees’ annual tax liabilities over the whole year. The contributions you make are itemised on your regular payslip every week or month. For the purposes of the PAYE system, “wages” include maternity pay, sick pay and adoption pay.
If you receive an occupational pension you’ll also find NIC and income tax details on your payslips. At the end of each tax year, you’ll be sent a form known as a P60, which shows the total annual amounts you’ve paid in tax and national insurance.
History
PAYE is a comparatively modern invention, which came into being towards the end of the Second World War. When the conflict broke out, there was an urgent need to gather extra revenue to support the war effort. At that time (1939), there were only ten million people in the UK who were eligible to pay tax on their income.
Through a progressive lowering of personal allowances, this figure expanded to fourteen million by the end of the War, driving the need for a more efficient tax collection system. Up until that point, people made half-yearly or yearly payments. The Pay As You Earn system came into effect in 1944 and from then on, tax was deducted regularly on each payday. Every employee leaving work also received a P45 form to hand in to the next employer, recording tax and income paid to date and a tax code number.
Benefits of the system
PAYE can be applied to any form of regular, taxable income. For example, it can be used to deduct regular increments off a taxable pension, as well as from other forms of income like rent or untaxed interest. PAYE protects people from having to paying a hefty tax settlement at the end of the financial year, and it entitles them to a range of state benefits such as statutory sick pay, paternity and maternity pay, adoption pay, paid annual leave of 4.8 weeks, and redundancy pay.
PAYE and your finances
If you’re a contractor, you can still take advantage of PAYE. There are useful PAYE payment solutions for your contracts. Instead of taking the limited company route, many contractors opt for being a consultant (or “employee”) to a third party, besides the recruitment agency finding the work and the end client. This “contract solution provider” is usually termed an umbrella company, and it works with the recruitment agency as well as signing a contract with the company you actually provide your services to. You submit a timesheet to your umbrella company, which then bills the recruitment agency. Crucially, you’re exempt from IR35 rules and you are paid on a PAYE basis, so your paperwork is minimal – and umbrellas generally offer the best returns available on your contracts by being as tax efficient as possible.
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How Does IR35 Affect You?
What is IR35?
Introduced by the previous Labour administration in April 2000 to close an alleged tax loophole, IR35 legislation has acquired certain notoriety amongst many freelancers. Why should a measure aimed at preventing tax avoidance have acquired such a reputation?
At that time, HMRC claimed that some contractors were practising a form of “disguised employment,” leaving their job as, for example, an IT technician on Friday afternoon and returning to the same firm on Monday morning, often doing the same work, only this time as a contractor rather than as an employee. Switching over to self-employed status had important implications for the amount of tax and national insurance contributions (NICs) due: the self-employed generally pay lower NIC charges to employees. HMRC began to grow concerned that it was losing out on important revenue on the basis of unscrupulous practises by contractors spuriously claiming to be self-employed but in reality doing an identical job for the same company. IR35 rules were devised to prevent this.
Problems with the rules soon began to emerge, however; they encouraged a form of “groupthink” on the part of HMRC, who began to presume guilt rather than innocence on the part of the UK’s 1.4 million entirely legitimate self-employed contractors. In reality, only a small proportion had knowingly behaved in this way. But this trend was undoubtedly exacerbated by the use of exceptionally ambiguous and unclear “employment tests” by HMRC to determine whether or not an individual was self-employed. The result was the introduction of a huge amount of uncertainty in the contractor marketplace.
Does it Affect you? IR35 Factors
You will be affected by IR35 legislation if you offer services through an “intermediary” rather than as a sole trader; typically, this means that you are providing your services through a limited company in which you are a shareholder with over 5 per cent of the shares and you pay yourself through dividends.
It’s as well to be aware of what exactly an “IR35 factor” is though, if you want to be as sure as possible about your status. These factors are components of the employment tests HMRC uses; if present, they make it likely that you will fall within the remit of the legislation. One of the key factors is whether you provide a personal service or whether you have the right to appoint someone else to do the work on your behalf; but there are others, too.
You’re likely be considered an employee if you’re paid by the hour, week or month; if you are eligible to overtime pay; if you work for one client at a time; if your tasks, work schedule and work methods can be directed by someone else; and if you work at locations decided upon by the client. Alternatively, if you’re self-employed, you’re likely to be able to decide on how the work is done; have more than one client at a time; be required to redo unsatisfactory work at your own expense and in your own time; and provide your own equipment.
An Effective IR35 Solution
One of the most successful and popular IR35 solutions for those who wish to avoid confusion over their status is to conduct freelance contracting through umbrella companies rather than limited companies. Essentially, umbrella companies act as employers to contractors who have obtained fixed contract assignments, most usually through a recruitment employment agency. The contractor will be paid by the umbrella company on a PAYE basis, with expenses such as meals, accommodation and travel allowances offsetting some of the income (this makes it a more tax and NIC efficient option).
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Credit Card Counseling vs. Debt Settlement
Credit card bills are certainly not the most welcome item in your mailbox. This is even truer when you have to contend with paying off very high credit card balances. As much as we would prefer to follow a relatively simply path to paying off our credit card debt, this may not be possible. The best way to deal with credit card debt would be to not get into such a difficult situation in the first place. Since we are well past that point, it becomes necessary to look at two other options: credit card counseling and debt settlement.
If there were two very divergent methods of dealing with credit card debt, it would be these two approaches. They are extremely far removed from one another in terms of their purpose and their approach. One is not necessarily inherently better than the other. Rather, one may be better than the other when taking an individual’s current situation into consideration.
How is this so?
Debt settlement can be considered a last gasp option many will seek when they are unable to navigate their current debt situation. Credit card counseling can be considered a viable process to employ when your debt situation is manageable and you do not need to take any extreme steps to deal with it.
So, how do you know which process would be best for you? Prior to making any determination of this nature, it is best to look at each process and present a clear explanation of them. From this, one may be able to make a determination as to which course of action to follow.
Credit Card Counseling
As the name implies, credit counseling entails discussions your current debt situation with a specialist. Such a specialist may be able to provide the needed advice required to get out of a tough financial situation. Remember, just because a person gets into debt does not mean the person knows how to get out a debt.
This may be the case even when the steps for getting out of debt might actually be relatively simple. As with all other professions, experience counts for a lot. A person with experience can look at a situation and explore it from a completely different perspective than others. Generally, credit counselors know exactly what must be done to reverse a bad situation. This is why their help and opinion can prove to be so very valuable.
There is no single, blanket approach to credit counseling. However, it is likely that most counselors will follow the following path: the counselors will look at your debt, they will determine where you are overspending, they will advise you on how to cut back on your budgetary expenses, they will help guide you to direct your additional newfound liquidity towards paying off your debts, and they will help you make appropriate decisions that keep you out of more debt in the future.
Obviously, the best course of action here would be to listen to the advice of a credit card counselor. In some instances, the advice you get may not be the advice you wish to hear. But, you are not looking for a “pick me up session” as much as you are seeking counseling to get out of heavy debt.
Debt Settlement
The process of debt settlement is a bit more serious and can be a bit more dire. Yes, there are those advertisements in the media that make debt settlement sound like an easy process anyone can take part in. Try not to fall for such ads. They are decidedly inaccurate in many ways. Debt settlement is not a process to enter in lightly. However, for those that have no other alternative, debt settlement may be the only way to go.
For those not familiar what debt settlement entails, it revolves around making a lump sum offer to a lender for the purpose of paying off a debt once and for all. For example, if you owed $5,000 on a credit card, you could make a $2500 single lump sum offer or a $3000 offer payable in three installments. The remained balance would be forgiven.
This does raise the obvious question as to why any lender would agree to such terms. Basically, if you can prove your ability to continue paying your debts is limited and you are heading towards bankruptcy, the lender may see debt settlement as the best option too.
Be forewarned: your credit score will be seriously damaged from a settlement offer. You will have, after all, defaulted on obligations. It is doubtful a settlement will be removed or repaired from your credit report and it will haunt you for seven years. That said, this will be decidedly less problematic than having to deal with 10 years of bankruptcy.
Yes, debt settlement does have its complexities. Only you and you alone can determine whether or not it is right for you. That is why you need to weigh your options as to whether or not this would be the right process to take part in.
Which One to Select
For those that are able to stay current on their monthly payments and have not fallen behind, a debt settlement plan may be premature to get involved with. Credit card counseling services may prove to be a great help in getting you back on the proper fiscal track.
Those that have fallen behind on their payments and do not appear to be in any position to get back on the proper payment track might wish to seriously consider debt settlement provided no other options appear available. Remember, debt settlement can cause serious issue with your credit score.
About: Hasic M is the editor of Think Credit Cards where he shares his tips on how to find a credit card that you will be satisfied with plus provides you with useful tips on credit card debt elimination.
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