“Which operating method is best for me?”
Is everyone looking forward to the bank holiday weekend? Although this is now our last bank holiday until Christmas! If you have any plans, let us know in the comments below.
This week for the blog, we will be looking at the different types of operating methods that can be used when contracting. We covered this back in early 2017, although we continue to get a number of questions from candidates, asking which method can they use and what does it involve etc. so we thought we would put out an updated version for any new contractors or anyone who would like a reminder.
There are three different operating methods that are available when contracting, which are: using your own Limited Company, using an Umbrella Company, or going the PAYE route. There is a slight difference on what operating method you can use depending if your contract has been confirmed inside or outside IR35. If your contract has been deemed outside IR35, this means you can choose whether to go the Limited company, Umbrella company, or PAYE route. If your contract has been deemed inside IR35, you are only able to choose from using an Umbrella company or PAYE. Always check on the job posting or with the recruiter what methods are on offer, as there are some departments that may have slightly different terms and will only accept the PAYE route, although this doesn’t happen very often.
Below is a brief description of each operating method and what is included in each.
Operating under your own Limited (LTD) company requires you to have 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.
I hope the above has given an insight into the three different types of operating methods and has given you an idea on what each one offers. If you have any questions on the above, leave us a comment, drop us an email or give us a call and one of the team will be happy to have a chat.
Have a great bank holiday weekend!