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Limited Company vs PAYE Umbrella
| PAYE Umbrella Company | Limited Company |
| Pros | Pros |
| Very easy to use, you simply enter your timesheet and expense details and wait to be paid. | The most tax efficient way of working, with a wider range of expenses to claim. |
| All tax and NI is deducted before you receive your money, so you will have no further taxes to pay. (Up to the 40% tax bracket). | You keep complete control of your financial affairs. |
| Ideal for short term contracts and contracts less than £25k per year. You only pay for the service when you are paid, you will not be charged between contracts. | Access to the Flat Rate VAT scheme. |
| Perfect if you are unsure if contracting is for you and you’re really just in between permanent jobs. | Running your own business isn't difficult (submit spreadsheets to your accountant). |
| Most importantly someone else will be doing all the paperwork and administration matters. | Greater opportunity for tax planning. |
| Cons | Cons |
| Your salary will be subject to full PAYE Tax and NI. | There is a certain amount of paperwork involved, between 10 and 20 minutes per month. |
| You are reliant on the umbrella company to collect your money from the client or agent and then to pay it to you. Contractor Umbrella will chase any overdue payments, on your behalf, free of charge. | Can be costly if you contract for a very short period of time and then go back to permanent employment. |
| Not ideal for low earners. |
In making the right decision you will need to consider a number of factors based on your own circumstances. We suggest you consider the following criteria:
- Length of contract - If you have a long term contract (over 12 months) or you intend to be a professional contractor and seek long term employment as a freelance contractor; a personal service company may be preferable.
- If you have a short term contract (less than 9 months) and you do not wish to remain contractor in the long term; an umbrella company solution may be preferable.
- Administration - Your attitude to administration, dealing with forms, returns, correspondence, accounts, spreadsheets, VAT returns etc. - if it is no problem, then take the personal service company solution. If keeping up to date with administrative duties is likely to be a problem, then the umbrella solution would be preferable.
- Caught by IR35 - If your contract is caught by IR35, the decision between the two solutions will not materially affect your net pay.
- Still Not Sure - If you are still not sure and the decision to go "own company" or umbrella is still a difficult one, then it would probably be best to go with the umbrella company solution for at least the short term. It is very simple to leave an umbrella company and start up your own company but very much harder in terms of administration and expense to go from your own company to an umbrella.
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