Umbrella PAYE vs Limited Company

Often in the umbrella industry, we are asked what is the best way for me to work? The answer to this question isn’t a simple one as to decide which one is best, you need to factor in personal circumstances. In this article, I will explain the pros and cons of Umbrella PAYE and Limited Company working.

To start let’s look at what both of these models are:

Umbrella PAYE –An employment model for contract and temporary workers, and umbrella company will manage all taxes, administration and insurance responsibility for all of its umbrella employees.

Limited Company– Also known as a Personal Service Company, a contractor would set up and manage their own business registered at companies house. All taxes and insurance responsibilities are undertaken by the director of the business the contractor.

Now we have an overview of the models lets look at the pros of both models.

Umbrella PAYE

·     Access to all Employment Rights

·     Tax and NI deductions managed

·     Access to pension programs

·     Insurance covered

·     Flexible solution to fit around you

·     Compliant and nationally recognised

Limited Company

·     Owner of a business

·     Business-related expenses are deductible

·     Considered the most tax-efficient model

Looking at the table I can imagine most of you are thinking well tax efficiency is very appealing, less tax more money! And while mathematically its true, let’s look at some of the con’s before we jump on the companies house sign-up page.

Umbrella PAYE

·     Not considered the most tax-efficient

·     Expenses are not deductible

·     Margin is a fee you pay for the administration

Limited Company

·     Additional costs for accountancy support

·     Insurance policy is required

·     All administration is the responsibility of the owner

·     Tax liability sits with the owner

·     Not flexible as tax submission are required each year, regardless

·     Additional legislation (IR35 and Criminal Finance Act)

Now you see “with greater earning comes great responsibility”, and while for some the additional administration and liability are acceptable. You need to understand that the legislation around operating through a limited company may disqualify you anyway.

If you have been reading my other blogs you will know that IR35 is changing the landscape for limited company workers in favour of more contractors working via an Umbrella PAYE type model.

But really the choice of solution is down to personal preference, do you want to operate as a contractor and do so without a large amount of administration? If so, then the Umbrella is for you. If you don’t mind learning about taxes and picking up additional admin after a days work a limited company might be for you.

Either way, both models are available to contractors today, and while I may be biased as we move into 2021 with certainty I can say that Umbrella PAYE is here to stay.