By Nicola Anderson, head of accounting, Boox
Most social workers considering locum work do so because they are after a better work-life balance or more flexible working. But whilst agency social work offers a number of great personal and employment benefits, there are things you’ll need to consider before you even think about handing in your notice.
What’s the right way to operate?
When you start as a locum social worker, you’re making a conscious decision to go self-employed. You’ll be your own boss and your first decision should be how you get paid for your work. There are three options:
1. Sole trader
You can operate as a sole trader, where you perform your work and get paid by your client into your own personal bank account.
All profits will be yours, but it’s your responsibility to make sure you settle your tax obligations each year via a Self-Assessment tax return. You’ll still need to pay income tax along with Class 2 and 4 National Insurance contributions.
The main downside of being a sole trader comes if your business starts to go wrong. If it ends up owing money, your personal assets get brought into the equation to settle your debts. You’re also likely to face a larger tax bill in your first year of trading.
This option is great if you’re adept at being ‘on the money’ with your finances. Remember that an element of all your income will be taxed in some way, so you can’t just think that everything coming in is yours freely to spend unless you want a hefty tax bill every January that you may struggle to pay.
2. Umbrella company
Working through an umbrella company takes away a lot of hassle if you don’t want to get your head around the legalities of being self-employed.
You become an employee of an umbrella company who collects payment for your services from the agency you are working through. They calculate your tax and National Insurance contributions and pay them to HM Revenue & Customs in return for a margin fee, which is also deducted from your pay.
This is usually the best option if you’re interested in working as a locum in the short term or are just too daunted by the legislation and extra administration associated with the other two options. You will also be able to claim for a certain number of expenses, which you can offset against your gross pay to reduce the tax you pay.
There is still some administration associated with the umbrella route, such as completing time sheets and claiming your expenses. Generally it is not the most ‘tax efficient’ way of operating and you are also reliant on a number of companies to ensure you are paid on time.
3. Limited company
Being a director of your own limited company sounds very grand and daunting at the same time. It does have added legalities compared to the other options, but it is not that complex if you get the right advice. If you are looking to be a locum for the long term then it can be the best option.
Tax rules are slightly different when you work through your own company – you are able to plan your tax more efficiently when it comes to taking money out of the business and you can also reclaim a wider amount of expenses, assuming they are solely for business use.
However, with your own company, you’re required to file annual accounts and tax returns, report your salary, have some of your information in the public domain and consider what to do about VAT.
A final point to make is that it is important to consider how you look for work as a locum. If you opt to use agencies then you are unlikely to be able to work as a sole trader.
In equal measure, there is usually an uplift in the rate offered to those who opt to work through an umbrella or limited company due to the agency having no obligation for paying employers’ National Insurance.
Getting help with the numbers
Some of you may be fairly proficient with a calculator and count every penny of your personal finances but when running your own business, things can become more complex. This is why you should consider using the services of an accountant to help you get to grips with your new venture and help keep the taxman away from your door as much as is legally possible.
The way you operate will usually inform whether you need an accountant. If you choose to go with an umbrella company you won’t, but it is likely you will need one for the other two options.
Take advice from friends and colleagues, and do your research online to see what type of accountant will work for you. Do you want the face-to-face contact (which could be more costly) or are you proficient enough to do things the modern way and use an online service with telephone guidance from a qualified advisor?
Whichever method suits you, try and find a specialist who has experience of dealing with your needs as a locum and compare services to make sure you’re getting the best value.
Does IR35 affect you?
IR35 is a rule that will only impact on you if you choose to operate through your own limited company. It was brought in by the government in 2000 as a response to a growing number of people leaving their jobs, only to return to the same business to do the same work as a locum.
If you are taking a long-term contract with a single client, particularly one you have worked for previously, then the contract of employment you have with your client will be a key indicator as to whether the work you do is deemed to be inside or outside IR35. HM Revenue & Customs will also look at your individual working practices when deciding on your IR35 status.
If your contract is found to be inside IR35, it will have a significant impact on your tax position, giving you a significant debt to HMRC in the form of outstanding tax and National Insurance contributions.
HM Revenue & Customs also has the power to look back six years into your work history, so it’s important your contract is reviewed by a professional before you take any locum role. Alternatively, use a reputable agency who have already had their contracts reviewed.
Dealing without full-time perks
Working as a locum social worker brings not only added responsibility for your finances, but you will need to manage with losing the ‘added benefits’ of being employed by a company – think sick pay, holiday pay and pensions.
As a locum it is unlikely you will earn anything when you’re sick or on holiday. You’re employed because of your specialist experience and as such are paid only for the time you are there.
All it takes to deal with this is a little advance planning and dedication to make sure you stick to the plan. Book your holidays in advance and make sure you earn enough ahead of time to cover the period you won’t be working.
The same applies if you become ill. Consider putting aside some of your income into an emergency fund to create a little buffer – this can also help should you find yourself between contracts and out of work for a time.
Pensions are a slightly different ball game. When you operate through a limited company, you can fund your pension through your company and take advantage by saving money on corporation and personal tax.
Umbrella companies will have their own pension schemes you can opt in or out of like any other standard employer, but the actual benefit of these schemes can be minimal. As a sole trader you’ll need to contribute to a personal pension scheme out of your own pocket and obtain tax relief on your annual tax return.
Insurance and mortgages
Becoming self-employed brings added complexity to your personal life, particularly when it comes to mortgages. Banks generally will take a dim view of the irregular income received by locums when it comes to making mortgage offers. Things are improving though in this area and there are now specialist contractor mortgages out there.
Setting up as a locum also means that you may need to consider taking out business insurance should the something happen as a result of your work you have done. It can be a requirement of your contract to have cover, and it also helps to showcase yourself as an independent entity should you be subject to a IR35 investigation.
Nicola Anderson is head of accounting at Boox, a specialist accountancy firm for locum social workers.