Limited Company vs. PAYE Umbrella: The Ultimate Guide

As a contractor, there are two ways in which you can operate: through a PAYE umbrella or your own limited company. Our guide will help to give you an insight into both routes and assess the differences between the two.

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.

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.

Our sister company, Parasol, can help should you chose to work under an umbrella company. The team have a wealth of industry knowledge and have managed over 90,000 umbrella contractors since they were formed. To speak to a member of their best advice team either call 0800 464 0412 or get in touch via the online contact form.

Limited company vs. umbrella company

Limited Company

PAYE Umbrella


Advantages


Advantages

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

 Idea; for contracts less than £25k per year

 Greater opportunity for tax planning

Someone else will be doing the paperwork


Disadvantages


Disadvantages

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)

Support from SJD

For advice and support throughout your contracting journey, SJD are here to help. Our team of expert accountants are always on hand to provide all of the help you need. Simply call 01442 330258 for more information.

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SJD Accountancy

SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 15,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

  • Unlimited face to face meetings. This is a unique service only SJD Accountancy offers - unlimited face to face meetings across the UK - tax is complicated and sometimes only a meeting will do.
  • UK's Largest contractor accountants with more qualified staff. No call centres, no outsourcing, no automated call handling. Simply telephone, email or meet your own dedicated accountant face to face.
  • Money back service guarantee. All your Emails received by 4pm on any normal working day will be answered the same day. Should it be necessary to leave a telephone message it will be answered same day/following day latest or we will make a full refund of that months fee.
  • Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market, including: Best Accountant for Contractors, Accountant of the Year and Best Professional Service Team to name just a few.
  • All inclusive low cost fixed fee accountancy package which includes completion of accounts*, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, your own dedicated accountant* and all company returns for a fixed fee starting from £120 plus VAT per month. Check our packages for more detail.

If you have any questions about contracting or would like any further advice please call our new client services helpdesk on 01442 275789 or email: janice@sjdaccountancy.com. Our new client services helpdesk is open Monday to Friday (8am to 6pm).

Appoint SJD Accountancy and never worry about your tax or accountancy affairs again.

Form your own Limited company with SJD - our same day online company formation service includes company bank account set up, VAT/PAYE registration and advice on optimum share structure. 

You may also find the following pages, guides and case studies useful:

*If you would like us to complete your company year end accounts we simply ask that you have been a client of SJD for one year or have made 12 monthly payments. All accountants are part or fully qualified.