Operating Methods: LTD, Umbrella and PAYE
Being a contractor there are a few ways that you can be paid for the work you carry out. These options break down to working under your own Limited Company, working through an Umbrella Company, and going PAYE under the agency that is placing you. In this week’s blog, we will be going through using each of these operating methods and what the benefits and disadvantages of using each of these are.
With the new changes that have been implemented with regards to IR35, if a role is in scope of IR35 the only operating methods that will be accepted are using an Umbrella Company or going PAYE. If the role has been confirmed as out of scope, all three operating methods can be considered.
Operating under your own Limited company requires having your own business and a business Bank Account. The main benefits of operating as a LTD company is that it is the most tax efficient method as a contractor. This is due to the way that the income is handled for a Business as compared to a direct employee of a company which overall saves money. Operating through a LTD company comes with a level of paperwork and planning which must be undertaken. Quite a few tasks can be offset to an accountant which is generally recommended when operating as a LTD Company. An accountant can also help with the initial setup of the business as well as managing ongoing accounts and Taxes.
Operating through an Umbrella Company essentially means becoming an ‘employee’ of a third-party company who bills the client of the contract. This is a relatively hassle free option for a contractor as the payments received from the Umbrella Company would have been subjected to Tax and NI prior to receiving it. As a new contractor this is a quick method to start as there is no setup time like there is for a LTD company.
The main downside of operating under an Umbrella compared to a LTD company is that you take home less pay and there are fees for using an Umbrella company. Though with the update to IR35 this option is quickly becoming the best paid option for roles that are in scope of IR35.
Operating under PAYE is essentially becoming an employee of the agency that you are taking the contract with and the employer deducts tax and national insurance contributions from your wage. PAYE is the most hassle free of the three operating methods as you do not need to do any paperwork as when you receive your payslip, everything is done for you. Although you receive additional benefits by going PAYE, most contractors prefer to use an Umbrella Company or going through their own Limited company as they will receive a higher income.
We hope this week’s blog has been helpful on what each operating method consists of. If you are unsure what option would be best for you, give the office a call and we will be happy to help. With the new IR35 changes that have been implemented, if this has meant that you will not be able to use your Limited Company as a role has been declared in scope of IR35, we are partnered with an Umbrella company that will be happy to have a chat with you about the benefits of using an Umbrella company. Just let us know and we can put you in touch.
We would love to hear your thoughts on what you feel has been the most beneficial operating method for you, so leave a comment below.
Have a great weekend!