0345 557 1287
Office Hours: 9am to 5.30pm
0345 557 1287
Office Hours: 9am to 5.30pm

PAYE Umbrella or Limited Company?

If you work as a contractor, chances are you have wondered whether to operate under a PAYE umbrella company or as a limited company at some point. In this guide, we will explore the pros and cons of each option to help you come to an informed decision if you haven’t already. Each of these options has a range of advantages and drawbacks, and what’s right for one business may be completely wrong for another.

What is PAYE?

PAYE is an acronym for ‘Pay As You Earn’. When you are paid under the PAYE system, income tax and NI contributions are deducted from your wage before you pick up your pay. Every umbrella company in the UK is legally obliged to follow PAYE rules when paying contractors. Any PAYE umbrella company that says they can reduce your tax bill legally is lying and should be avoided. You will be expected to pay the same rates of tax and NI as anyone else when you work under an umbrella company but will have much less paperwork to deal with than a self-employed contractor that doesn’t.

How do I decide how to operate?

Factors that can help you decide whether you should work as a limited company or under a PAYE company include the amount of time you have to spend on paperwork, how long you plan to be a contractor for and how much pay you take home. Working as a limited company can mean dealing with much more paperwork, though you may be able to make considerable tax savings depending on your circumstances.

The benefits of limited companies

If you work as a limited company, you will have more control over your accounts, taxes and salary. However, you will have to spend more time focusing on duties away from your core activities. You will need to decide how much to pay yourself. The figure you do pay yourself will include your salary and dividends. You will be tasked with establishing your limited company and opening a business bank account for it.

A greater level of control

People set up limited companies to enjoy total control over their financial affairs, claim back a bigger range of expenses and so they can work with personal accountants who can maximise the amount of money they take home. The vast majority of people that do set up limited companies tend to generate at least £35,000 per year, so if you have not quite reached this level yet, it may well be worth working under an Umbrella company as the benefits won’t be as sizeable.

Increased paperwork

If you do decide to set yourself up as a limited company, you will become a director of it. You will need to submit accounts to Companies House on an annual basis, meet all HMRC deadlines and will be expected to keep the company solvent whilst running it responsibly. Most people who run limited companies pay themselves a modest salary and draw the rest of their income from dividends, which aren’t subject to NI contributions. As a limited company, you will pay Corporation Tax on your profits at an annual rate of 19%. You will need to pay VAT on your invoices each quarter. Forming a new company is an incredibly quick process and can be achieved in a single day.

Why work under a PAYE umbrella company?

There are many advantages attached to working under a PAYE umbrella company, especially if you don’t want to spend a great deal of time focusing on the administrative side of things. Your PAYE umbrella company will act as your employer, deducting tax and National Insurance from your pay before it reaches your bank account. One of the advantages of this is that it can help you avoid falling behind with your tax and NI obligations. Once you have submitted your weekly, fortnightly or monthly timesheet to the umbrella company, they will handle pretty much everything else for you.

Reducing the admin burden

Many contractors prefer to work under PAYE umbrella companies as they see it as a more straightforward way of doing business. The people most likely to benefit from working under a PAYE company are those on less than £35,000 per year, those who want to keep the admin burden to a minimum, new contractors and contractors who don’t know how long they will be working in the manner they currently are. If you are considering working under a PAYE company, you need to do your homework and make sure you are dealing with a reputable business. Many less-than-scrupulous companies on the market will claim they can help you pay less tax than you actually need to. These companies are always best avoided, and there’s always a risk you will find yourself in a great deal of hot water later on if you enter into a legally dubious tax avoidance scheme.

Avoid IR35 accusations

One piece of legislation that has been catching out many freelancers and contractors over recent years is IR35. This legislation was introduced by the Government to reduce the number of ‘disguised employees’. These employees are those that would appear to be directly employed by a company even though they are working as contractors, enjoying the same tax benefits as a limited company contractor. If you are concerned that you could be caught out by this legislation, it may well be worth getting in touch with a PAYE umbrella company as soon as you can.

Contact One Click today

At One Click, we can come to your assistance if you are interested in joining a PAYE umbrella company. We can offer several services to reduce the admin burden and can log expenses, manage your receipts and help you complete your tax returns. We are waiting to hear from you right now if you are ready to hear more about what we can do for you. To reach us today, simply give us a call on 0345 557 1287. Call now to speak to an expert advisor.

Recent Tweets