Limited company vs PAYE Umbrella - what's best for you?

So you've been offered some contract work that you think you're likley to accept. But how do you know the best way to manage payment, after all you don't want all your yoru hard earned dollars to be gobbled up in tax!

PAYE Umbrealla option -  This is where you ' the contractor' essentially become an employee of an umbrella company/management company. You  would submit time-sheets to the umbrella who will in turn will invoice the end client (or recruitment agency) for the work done by you. You will then be paid as a PAYE employee less the umbrella fee.

You would usually be allowed to claim some basic expenses, however it's wise to be cautious of some umbrella companies if you see them advertise 'special' dispensations or expense policies 'approved by' the IRD (Inland Revenue), that claim to allow expense claims without the need to produce receipts. The Inland Revenue have made it clear that they intend to challenge companies considered to be actively encouraging tax avoidance through fraudulent expense claims.

Limited Company option

It is very important to stress that if you opt for this route that these must be genuine, one person limited companies and not a 'scheme' dreamed up by what are nothing more than marketing organisations.

You would need to form a limited company and open a business bank account (your accountant will help you with this). The director controls invoicing, the company bank account and decides on how much to pay themselves, which is made up of a combination of salary and dividends.

The limited company's contract could either be with a client or a recruitment agency, either way your company can claim as tax free expenses: travel and subsistence, hardware and software, training, business and professional subscriptions, business telephone, accountancy fees plus any other business costs.

As an additional advantage, by running your own limited company you effectively have a business that you can grow, subcontract from, or even sell when you retire or want to exit the market.

You may also like to read our guide to contractor expenses

Below, we've summarised the pros and cons of each method, for a more detailed review for our full first-timer guide and here for our guide to contracting.  

Limited Company VS PAYE Umbrella