Every contractor has two rather tricky choices in front of him/her when it comes to how they operate – as a part of a PAYE Umbrella or as an independent Limited Company. Choosing to go for a Limited Company or a PAYE Umbrella both come with their fair share of advantages and disadvantages. It all depends on a contractor’s requirement, perspective, experience, the timeframe you wish to work for and how much of that time you wish to dedicate to important but tedious paperwork and other administrative duties. The latter usually seals the deal and helps contractors decide which way to move forward.
Simply put, there are a lot of considerations to bear in mind when deciding between the two. Eventually, it all comes down to looking within and questioning yourself whether or not you can take up the responsibility of running an entire company by yourself or if you are prepared to part with a portion of your earnings.
When it comes to controlling your work and being in charge of your own financial and tax affairs, limited company contractors definitely enjoy an increased work experience than the contractors who work under an umbrella company. When you own a limited company, the sky’s the limit. As the CEO or the owner who runs the company, the onus of making all the decisions and running your company as you see fit lies on your shoulders. Therefore, if you are fully equipped and prepared to take up this responsibility, you could greatly benefit from a limited company. It will also give you scope to develop and adapt your business according to the change in circumstances and the industry fickleness. It also means that you will be the very first person to know when things backfire, and so, you can work towards fixing them immediately. If you work as a PAYE umbrella contractor, it definitely points towards lesser paperwork than its counterpart. However, if you are not a person who likes handing over the reins of your livelihood or your work in the hands of somebody else, you will definitely not appreciate any advantages offered by an umbrella company.
2. Tax Efficiency
You will quickly become a part of the PAYE or “Pay as you earn” system when you join an umbrella company. This means that you can claim back some expenses against your tax liability. Owning a limited company can be regarded as perhaps the most tax efficient manner of working. But that also means having to take care of a whole other accountancy department by yourself. Although you can claim back more expenses when you run or work in a limited company, you might not want the hassle of being in charge of the accounts too. Again, it is all a matter of perspective.
3. Take Home Pay
Umbrella companies pay as per the work delivered by the contractors. Working under a PAYE umbrella company means taking most of the efforts out of working and getting paid for exactly the services you are offering. This means that the more or less you decide to work as per your convenience and schedule, you will be paid accordingly. On the flip side, if you work in a limited company, you might be able to take more home pay than you would in an umbrella company.
This is one of the most convincing reasons for working under a fully established umbrella company. When you do that, you save yourself from the majority of the stress and headache that comes with running the entire thing by yourself. Running your own limited company can be a time-consuming, complex and often daunting task. Joining an umbrella company saves contractors from a lot of paperwork and other administrative tasks. It also means that you will not be expected to move mountains as opposed to running a company.
5. Set Up
It is fairly easy to incorporate a limited company. Provided you know the rules and have enough information about the steps that need to be followed, you can carry out this task without much hassle. With an umbrella company, you need to put in even fewer efforts. All that will be required of you is becoming an employee in a PAYE umbrella company, and that’s it! Beyond the terms stated in your employment contract, not much will be expected from you.
This guide has been designed to help you understand the difference between a limited company and a PAYE umbrella. As stated above, both the options have their share of pros and cons. You can decide according to your preference, schedule and after careful consideration of the factors given above. If you are looking for any more advice, you might want to get in touch with Target Accounting. Being in the industry for a long time, we are fully equipped to recommend a solution that will work at the best possible outcome according to your circumstances.