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Contractor PAYE

PAYE Umbrella Company vs. Limited Company

As a contractor one of the main decisions you will have to make is whether to be deemed a PAYE umbrella company or a limited company. This is a monumental decision and one that needs to be considered very carefully. Before assessing the advantages and disadvantages of both let’s first provide a description of what each one actually encompasses. 

PAYE Umbrella – The contractor (i.e. you) will technically become employed by an umbrella company. This means that you will have to submit time sheets for the work you have completed. It is then the duty of the umbrella company to invoice your client. You will receive payment as a PAYE employee yet you will of course need to give the umbrella company a percentage. 

Limited Company – The other option is to become a limited company. You need to officially form this company and set up your own business bank account. The company’s director handles all of the invoicing and consequently decides on what wage they will take from the business. 

So, the real question is; which one is better? The truth is there is no right or wrong answer. It depends on you. An umbrella company is better for some, whilst setting up shop as a limited business is better for others. Nonetheless, by assessing the advantages and disadvantages of both you should be able to make up your mind. 

Let’s begin by assessing the advantages of going down the PAYE Umbrella route…

  • You don’t have to deal with any paperwork.
  • Extremely easy and convenient – All you need to do is enter the details into your timesheet and provide information on your expenses, from credit card processing to rental fees.
  • Ideal for those who are unsure whether contracting will be a long-term solution for them. 
  • You don’t have to worry about tax and National Insurance. This will be taken away before you receive your payment. 
  • This tends to be the most beneficial option for those who have a contract of less than £25k per annum.

There are some great advantages there, but what are the pitfalls?

  • It’s more expensive; you need to pay full NI and PAYE tax. 
  • You are reliant on the umbrella company (nonetheless, if you choose the company wisely then this shouldn’t be an issue at all). 

Now you have a well-rounded view regarding becoming a PAYE umbrella company, let’s discover the benefits of going down the limited company route…

  • The ability to claim a broader selection of expenses.
  • You are in complete control – You are running your own business at the end of the day. 
  • You get accessibility to the scheme for Flat Rate VAT.

And finally, let’s take a look at the disadvantages associated with this option…

  • You will have to take care of the paperwork yourself. 
  • Not recommended for anyone with a contract that amounts to less than £25k per annum. 
  • This option can actually end up being a costly one if you only embark on contracting for a short period of time then decide you actually want to be in permanent employment. 

You now have a well-rounded picture of both Limited Companies and PAYE Umbrella. You should now be able to make your decision regarding what option to choose. Nevertheless, this is not something you should rush into. Make sure you consider it carefully! 



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