Contractors Information

Whether you are a seasoned contractor or looking to jump into the contract market, understanding the employment options available and the advantages and disadvantages is a must.

There are several main methods of trading that most people looking for a career in contracting turn to and these are:

  • Working via a PAYE umbrella company
  • PAYE through an agency (if the agency offers this service)
  • Working as a sole trader
  • Setting up your own limited company

Working as a contractor via an umbrella company

An umbrella company is essentially a middle man between contractors and the company they are contracting for. You are employed by the umbrella company (which means IR35 isn’t an issue because you pay PAYE/NIC on all your earnings) and they handle all the admin concerned with your contract such as invoicing, tax, VAT and National Insurance contributions for a fee.

These days a lot of Umbrella companies will charge a fixed fee for their services however some do still charge a percentage of your pay, which could make working through an umbrella less cost efficient so it’s worth asking about this when shopping around. Umbrellas will differ in charges and service.

Although you’re on their payroll, your pay is determined by your specific contract agreement, and the umbrella company will invoice, chase and retrieve your money for you. Better still, they’ll help you claim all your legitimate employee expenses, offsetting them against tax. This is done because your monthly expenses are deducted from your salary before tax is applied, so you only pay tax on the lower amount which in turn maximises your take home pay.

A good umbrella company will also provide a full contract of employment, HR support, guaranteed hours of work, invoicing and timesheet management.

The best contractor focused umbrella companies will also issue invoices on your behalf, collect payments from clients, calculate tax and NI contributions and pay your net pay direct to your personal bank account, without holding on to it.

An umbrella company is a great way of starting out, particularly if you’re not sure the contracting life is for you. You can dip your toe in the water without the commitment of setting up on your own.

So as a brief checklist, an umbrella company is a good choice if:

  • You’re a contractor working on short term contracts from 1 day to 6 months
  • You only plan to be a contractor for the short term
  • You want to test the water and try contracting for a while before committing
  • You have a natural aversion to paperwork and shudder at the thought of having to do a tax return
  • You want to stay out of the whole IR35 debate
  • You travel medium to long distances and claim travel and subsistence expenses

Not so good if:

  • Your contracts last longer than 6 months
  • You’re quite happy taking on responsibility for your accounts
  • You don’t have internet access
  • You can’t claim much by way of travel and subsistence expenses
  • You’re a high earner, over £35,000 a year

Working as a contractor via your own limited company

Limited liability companies exist in their own right, which simply means for a contractor that their personal finances and their company’s finances are two separate things so a contractor will not be personally responsible for company debts (although as a company director you might be asked to give a personal guarantee for any bank loans etc).

Setting up a limited company is the most popular option for contractors, because it’s often the most profitable. For example, you may pay significantly less in National Insurance contributions.

However, it does come hand in hand with added responsibility; you’ll be running your own business, which means setting up a company, arranging your own insurance, finding an accountant, taking responsibility for your accounts, checking your IR35 status and making sure you’re paying the right tax.
All things our specialist consultants will be able to advise you on.

Contracting via your own limited company is a good choice if:

  • You’re a freelancer working on multiple short projects
  • You want to maximise your take home pay
  • You’ve decided to commit to contracting for the long term
  • You’re happy to take on the extra responsibility
  • You’re happy to manage your own finances and set aside money for tax

Not so good if:

  • You don’t want any hassle or responsibility at all
  • You can’t get your head around the basic principles of tax, IR35, National Insurance contributions and so on
  • You want to pay tax as you earn (PAYE), instead of being landed with one big tax bill
  • You earn below £35,000 a year


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