Limited Company vs PAYE Umbrella - 'The ultimate (quick) guide'
Before we begin, you may find our new page helpful in understanding the difference in take home pay: Take home pay Limited company or Umbrella company - The Real Story
PAYE Umbrella
This is where you ' the contractor' essentially become an employee of the umbrella company. You submit time-sheets 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 the umbrella fee.
You will usually be allowed to claim some basic expenses, however be cautious of umbrella companies advertising 'special' dispensations or expense policies 'approved by' the Inland Revenue, that claim to allow expense claims without the need to produce receipts. The Inland Revenue have made it clear that they intend to challenge any company considered to be actively encouraging tax avoidance through fraudulent expense claims.
You'll typically take home around 60% - 65% of your contract by working through an umbrella company.
For details of our award winning umbrella service click here.
Limited Company
It is very important to stress that these must be genuine, one person limited companies and not a 'scheme' dreamed up by what are nothing more than marketing organisations.
The first things you, the contractor will need to do are form a limited company and open a business bank account (your accountant will help you with this). 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.
The limited company's contract can either be with the end client or the agency and the company can claim as tax free expenses: travel and subsistence, hardware and software, training, professional subscriptions, business telephone, accountancy fees plus any other business costs.
You may also like to read our Guide to Contractor Expenses, new page about 'How much can I earn as a contractor' and take home pay case studies of a contractor using an umbrella company and another who's working through their own limited company.
You'll typically take home around 75% - 80% of your contract by working through your own limited company.
Below, we've summarised the pros and cons of each method, for a more detailed review click here for our full first-timer guide and here for our step-by-step guide to contracting.
Limited Company PAYE Umbrella
Limited Company |
PAYE Umbrella |
| Advantages | Advantages |
| The most tax efficient way of working. | Very easy to use, you 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 meaning you do not have to risk your money with any third party administrator. | Ideal for contracts less than £25k per year. |
| Running your own business isn't difficult; submit spreadsheets to your accountant - just like umbrella time-sheets and expenses. | Good if you are unsure if contracting is for you and you're really just in between permanent jobs. |
| Greater opportunity for tax planning than PAYE Umbrella | Someone else will be doing all the paperwork. |
| Negatives | Negatives |
| There is a certain amount of paperwork involved, usually about 10 - 15 minutes per month. | The most expensive way of working. You will receive a salary that is subject to full PAYE Tax and NI, it's just like being a permanent member of staff again. |
| Can be costly if you contract for a very short period of time, then go back to permanent employment. | You are reliant on the umbrella company to collect your money from the client or agent and then to pay it on to you. |
| Not ideal for contracts less than £25k per year. | - |
Illustrations / take home pay calculator
Click here for our Limited company business calculator and here for ContractorUmbrella's calculator.
You may also find the following pages, guides and case studies useful:
Take home pay calculator - How much could you be taking home
First time Contracting or Freelancing? - A summary of the alternatives along with pros and cons
Step-by-step Guide to Contracting - Download a FREE copy of our guide
Pay less tax - the definitive guide to paying less tax as a contractor
Take home pay case studies - Examples of contractors using a ltd co. & umbrella co.
Expenses Guide - Know exactly what you can claim
Umbrella company guide - Everything you ever wanted to know about umbrella company services
Online accountants - Beware of online only accountants
IR35 Guide - A great plain English guide to IR35
If you have any question about contracting or would like any further advice please either contact your SJD Accountant or call our new client services helpdesk on 0500 152500 / 01442 275789 or email nikki.hanlon@sjdaccountancy.com.
Appoint SJD Accountancy and never worry about your tax or accountancy affairs again!
About SJD Accountancy
SJD Accountancy is the UK's largest specialist provider of fixed fee, limited company accountancy services to contractors and freelancers. We've been acting for clients across the UK since 1992 and have more than 11,000 already.
We are the only national specialist firm of accountants with offices in all major UK cities, so you’ll never be far from your accountant. SJD also has more qualified staff than any other firm in our market, with qualifications from the following major tax and accountancy bodies - ATII, ATT, ACCA, CA, ACA, FCCA, ACMA. You’ll also be pleased to know that we are one of the lowest priced as well. All of our clients receive:
• Free face-to-face meetings. This is another unique service, only SJD offers free face to face meetings - tax is complicated and sometimes only a meeting will do.
• Unlimited access to your own dedicated accountant. 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 telephone calls and emails will be answered the same day or we will refund your monthly fee.
• Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market.
We offer an all inclusive low cost monthly package which includes completion of accounts, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, unlimited access to your accountant and all company returns.
All this for a fixed monthly fee of £110 plus VAT, which is one of the lowest prices in the market.
If you have any question about contracting or would like any further advice please either contact your SJD Accountant or call our new client services helpdesk on 0500 152 500 or email nikki.hanlon@sjdaccountancy.com.
If you wish to appoint us as your accountants immediately, the quickest and easiest way to do so is by accessing our Client Agreement Form.
