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All you need to know about contractor pay types - PAYE

  • Publish Date: Posted 14 days ago
  • Author: Rebekah Valero-Lee
Finding the right pay option for you is a vital part of the contractor onboarding process. It is important that you make the right decision based on your circumstances. Here you can find some important information on the PAYE pay option.
Read this guide carefully so you make the right choice when it comes to choosing your pay option.
All you need to know about contractor pay types - PAYE

Pay as You Earn

PAYE is a commonly used pay option that ensures your employer pays your income tax and national insurance contributions on your behalf. The employer is responsible for collecting and sending your tax contribution to the HM Revenue and Customs. It is important to note that your employer will deduct your tax contribution from your salary before you receive your pay.  Your payslip will tell you how much tax and national insurance contributions you have paid.

Want to learn more about contracting through an umbrella company? Read the blog and compare your options!

Positives of PAYE for contractors

There are several benefits of choosing PAYE as your pay option:

  • PAYE is the simplest way to be paid. Your employer calculates, collects and sends your contribution to the HMRC through your deductions.

  • Your employer handles your tax contribution, so you only need to provide your timesheet.

  • As it is the easiest way to get paid, PAYE is often the perfect pay option for contractors who are only working on a single project or short contract.

  • Your tax contribution is always registered so it will never be contested.

Negatives of PAYE for contractors
  • As you are registered as an employee, you are entitled to less tax relief than a limited company or sole trader.

  • You are not able to obtain tax relief on out of pocket expenses

How is PAYE Calculated?

PAYE is calculated based on how much you earn and whether you’re eligible for the personal allowance, which is the amount you’re able to earn tax-free each year (2021 -22 it is £12,570).

Depending on your basic rate you could be charged either 20%, 40% or 45% tax over your personal allowance, the rate you pay will be determined by your income. These PAYE tax rates apply everywhere in the UK aside from Scotland.

PAYE is generally split into equal amounts over the year, this is inclusive of tax unless you receive a bonus or any other benefits. If you have paid too little or too much tax, this will be correctly sorted out through HMRC at the end of the tax year not through your employer. You can calculate your tax and how much you could expect to pay through a tax calculator.

Will I get a pension with PAYE?

When you register as a PAYE employee you will enter a 12-week postponement period. The postponement period is used to assess contracts and determine who should be enrolled in the workplace pension scheme. It can also be used to assess a contractor’s performance and suitability to the role.

Workplace Pension Eligibility

 Once you have passed the postponement period, your eligibility will be assessed.

Eligibility criteria:

  • You are at least 22 years old and under the state pension age

  • You earn more than £805.00 per week, this is based on the national earnings trigger

  • You usually work in the UK

If you pass the eligibility criteria you will be automatically enrolled into the workplace pension scheme. Whilst enrolled, 3% of your total monthly earnings will be placed into your pension pot.

What if I’m a temporary worker?

Temporary contractors are entitled to a slightly different pension scheme called the People’s Pension. The enrolment criteria and process are very similar to the workplace pensions scheme. The only difference is that the People’s Pension is managed by a third-party pension’s provider. But it's always a good idea to check with your employer. 

Ready to search for a new job with Morson? Click here to find your next opportunity.Or, if you’re a contractor and want to find out more about IR35 and how it may affect you, click here to read our blog series.