UK contractors have two choices when it comes to deciding how to operate. They can either use a PAYE umbrella company or, alternatively, set up their own Limited Company. An umbrella company and a limited company each represent two of the most common business structures that contractors use. But which one is the best option for you?
If you choose to be a contractor with your own Limited Company, you’ll need to setup a Ltd Company, and have sole responsibility for your accounts, taxes and salary. Most contractors choose to engage the services of an accountant to take care of all of this. You’ll be responsible for opening a business account for your transactions. As the director, you’ll be responsible for that bank account as well as invoicing. A limited company is a good option if you are dedicated to contracting and want to work with multiple clients.
If you choose to be a freelancer who works under a PAYE umbrella company, they will be acting as an employer, taking over all of the above-mentioned responsibilities. All you’ll need to do is submit a time-sheet and the umbrella company will pay your salary to you, having already deducted tax and National Insurance. An umbrella company is a solid choice if you are new to contracting and want to test the water with one client. Additionally, if you are on a lower daily rate there may be very little difference in tax efficiency.