As a contractor, there are two ways in which you can operate: through a PAYE umbrella or your own limited company. Speedy’s guide will help to give you an insight into both routes and assess the differences between the two.
Limited company vs. umbrella company
The most tax efficient way of working
Very easy to use – simply enter your timesheet and expense details and wait to be paid
Claim a wider range of expenses
All tax and NI is deducted before you receive your money, so you will have no further taxes to pay
Access to the Flat Rate VAT Scheme
Ideal for short term contracts
You keep complete control of your financial affairs
Ideal for contracts less than £25k per year
Greater opportunity for tax planning
Someone else will be doing the paperwork
You will have to complete your own paperwork
The more expensive way of working – you will receive a salary that is subject to full PAYE Tax and NI
Can be costly if you contract for a short period of time then return to permanent employment
You are reliant on the umbrella company to collect your money from the client or agent and use it to pay you
Not ideal for contracts less than £25k per year
You have no control over your contracting finances (for example, dividends)
Contracting through your own limited company
Contracting under a limited company means that you will be responsible for establishing your company and for submitting all relevant tax and business documentation to HMRC.
You will need to establish your limited company and open your business bank account (your accountant will help you with this and we partner with Metro Bank) before you can begin operating. The director controls invoicing, the company bank account and decides on how much to pay themselves, which is made up of a combination of salary and dividends.
Your limited company’s contract can either be with the end client or the recruitment agency and as long as the contract falls outside of IR35, there are a number of tax expenses you can claim tax.
You will typically take home around 75% – 80% of your contract by working through your own limited company.
Contracting through a PAYE umbrella
Working for an umbrella company means that you, the contractor, essentially become an employee of that company. You submit timesheets to the umbrella who will, in turn, invoice the end client (or agency) for the work done by you. You will then be paid as a PAYE employee less a small margin for their services.
Using an umbrella company is usually best for those starting out in contracting on short term contracts (under 3 months) and who are earning less than £25,000 per annum. There is less paperwork involved as the umbrella agency takes care of all your tax and national insurance contributions as you are technically employed by them.
You will typically take home around 60% – 65% of your contract by working through an umbrella company.