Limited Company or PAYE Umbrella Company

In a Nutshell

Your Choice

In a Sentence

Your attitude to administration & paperwork will determine whether you should manage your own limited company or use the services of an umbrella company.

Limited Company

First of all, you will have to;

• Setup a your limited company
• Open a business bank account in the name of your limited company
• Buy insurance(s) cover (dependent on the terms of your contract).
• Your limited company accountant will help you with all of this administration setup.

Directorship & Responsibility

You will become a director of your limited company. A limited company only needs one director. As a director you will control invoicing, the company's bank account and figure out how much to pay yourself.

Directors have legal responsibility on the correct running of the limited company. Even though you will appoint an accountant to help you out, the responsibility for compliance will still be with you.

Payment & Contracts

What you pay yourself will be made up of two elements: a salary and dividends. Both elements will depend on what gross income you are earning.

Your limited company will enter into a contract with your recruitment agency or, sometimes, the end-client. Trading via your limited company means you can claim tax free business expenses, such as:

• Travel & subsistence
• Hardware & software
• Training
• Subscriptions to appropriate publications
• Business telephone costs
• Accountancy fees
• Other direct business costs that are paid for out of your private limited company's bank account.

How Much

The industry average price for an accountant specialising in the contractor market is around £100 per month.

Your contractor accountant will expect you to enter into a 12 month engagement that coincides with the trading year of your limited company. You should be able to take home roughly 80% of your gross income.

PAYE Umbrella Company

A PAYE umbrella company becomes the contractor's limited company and the means of trading as a contractor. You become an employee of the umbrella company.

A PAYE umbrella company is simply a ready-made ready-to-go limited company with none of the burdensome setup hassles. There are no minimum tie-in periods. You use the services of an umbrella company just as & when required.

Paperwork & Pay

You send your authorised timesheet to the PAYE umbrella company. The umbrella company will then invoice your recruitment agency based on the hours worked x your rate specified in your contract.

As soon as your umbrella company is paid, they will pay you your net salary directly into your personal bank account. Payment is always made having calculated your PAYE tax deductions, so you will not have any complex tasks like that.

Responsibilities & Obligations

You have to send your timesheet & any expense claims to your PAYE umbrella company. This is normally done via a secure portal on their website, by email or fax.

That's it. You have no further responsibilities or obligations. Your umbrella company takes care of all other administration, red-tape and hassles. You will not be charged a setup fee, and will only pay the umbrella company when they are processing your paperwork.

You can increase your net take-home pay by claiming certain business expenses like travelling costs and subsistence expenses.

How Much

The industry average price for a PAYE umbrella company for contractors is around £70 per month. Working through a PAYE umbrella company you will take home around 70% of your gross income.