Limited Company vs PAYE Umbrella - 'The ultimate (quick) guide'

PAYE Umbrella

This is where you ' the contractor' essentially become an employee of the umbrella 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 ultimately you are employed by them.

You'll typically take home around 60% - 65% of your contract by working through an umbrella company.

We have a sister company, Parasol who 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 visit www.parasolgroup.co.uk

Limited Company

This is where you become the director of your own limited company and are responsible for submitting all relevant tax and business documentation to HMRC.

The first things you, the contractor will need to do is form a limited company and open a business bank account (your accountant will help you with this and we partner with Metro Bank). 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 recruitment 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 as long as they are outside of IR35.

You'll typically take home around 75% - 80% of your contract by working through your own limited company.

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.

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 v's 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; your personal accountant will help you manage all your finances. 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 take home pay calculator.

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

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 nikki.hanlon@sjdaccountancy.com.

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

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.