Contractor Pay Guide

Umbrella Company

An Umbrella Company acts as an employer for contractors working on fixed-term assignments. You become their employee, and they handle most of your payroll and tax obligations.

Pros:

• Simplicity: Minimal administration for you. You submit timesheets, and the Umbrella company processes your pay, deducting tax and NICs.
• Ideal for Inside IR35: If your contract is Inside IR35, an Umbrella is often the most straightforward way to get paid.
• Employee Benefits: You may get statutory benefits like sick pay and holiday pay (though holiday pay is often rolled up into your rate).
• Continuous Employment: Can help create a record of continuous employment, which might be useful for mortgages or loans.

Cons:

• Less Tax Efficient: Generally less tax-efficient than a well-run PSC operating Outside IR35, as all income is subject to PAYE.
• Costs: Umbrella companies charge a margin (weekly or monthly fee) for their services.
• Employer's NICs: The Umbrella company will also deduct Employer's National Insurance and sometimes the Apprenticeship Levy from the funds received from the agency/client before calculating your gross pay. This effectively reduces your take-home pay compared to the initial contract rate.
• Less Control: You have less control over your finances compared to running your own PSC.

Limited Company (Personal Service Company - PSC)

Operating through your own Limited Company means you are a director and shareholder of your own business. Your company contracts with the client or agency.

Pros:

• Tax Efficiency (Outside IR35): If your contracts are genuinely Outside IR35, this is usually the most tax-efficient way to operate. You can draw a small salary and take the rest as dividends. Explore further tax planning strategies.
• Control: You have full control over your company's finances and business decisions.
• Claim Expenses: Wider range of allowable business expenses can be claimed, reducing Corporation Tax.
• Professionalism: Can present a more professional image to clients.
• Flat Rate VAT Scheme: Potentially beneficial (though less so in recent years for many service-based contractors).

Cons:

• More Admin: You are responsible for company accounts, tax returns (Corporation Tax, VAT, Self Assessment), and statutory filings. Most contractors hire an accountant.
• IR35 Risk (if status is your responsibility): If you get your IR35 status wrong for a small private sector client, HMRC can pursue your company for unpaid taxes, interest, and penalties. Consider IR35 insurance for peace of mind.
• Not Ideal for Inside IR35: If your contract is determined to be Inside IR35 (by a medium/large client or public sector body), the tax benefits of a PSC are largely negated. You'll be taxed similarly to an employee, but still have the admin burden.
• Costs: Accountancy fees, business bank account, potential software costs.

Which is Right for You?

• If your contracts are consistently Inside IR35: An Umbrella Company is often the simplest and most compliant route.
• If your contracts are consistently Outside IR35 (and you're comfortable with the admin): A Limited Company offers greater tax efficiency and control.
• If you have a mix of Inside and Outside IR35 contracts: This can be complex. Some contractors maintain a PSC for Outside work and use an Umbrella for Inside work, or discuss options with their accountant.

Consider your contract duration, income level, attitude to risk, and willingness to handle administrative tasks when making your decision. You can also maximise your take-home pay with careful planning.