Most UK contractors use one of three operating methods, Agency PAYE, Umbrella Company Employment, or their own Limited Company. In this article, we'll break down these three options in simple terms, to help you decide if umbrella company employment is the best option for you.
This is where you’re engaged directly by the agency, who will pay you through their own PAYE system for work you do for their client. Any tax and National Insurance contributions due on your income will be deducted by the agency when they pay you.
You’ll be employed separately for each assignment, so you’ll have a new period of employment for each end client or agency that you work for. If you work as a contractor for any length of time this can make for a complicated CV, and difficulty obtaining references or credit.
You may be engaged as a “worker” rather than an employee, which means you don’t have access to full employment rights, and certainly anything that relies on length of service is unlikely to apply. The engagement terminates at the end of each assignment, so while you’re not working you have no rights at all, even if you intend to continue working for the same agency.
Generally, agency PAYE is only suitable for workers who don’t intend to continue contracting for very long, for example if you’re starting a new job on a temp to perm basis, or you’re contracting as a stop-gap between permanent roles. If you intend to continue contracting for any length of time, or if you’re likely to complete a succession of different assignments, you’ll almost certainly be better off with one of the other two options.
Umbrella company employment
As the name suggests, if you choose this option, you’ll be employed by an umbrella company, who will supply your services to the agency. The agency will pay the umbrella company for the work you do for their client, and the umbrella company will pay you as their employee. Again, any tax or NICs due on your employment income will be deducted by the umbrella company when they pay you.
You can expect to be paid roughly the same through an umbrella company as you will through agency PAYE, but umbrella employment has some important advantages.
You’ll be an employee of the umbrella company, rather than a “worker”, which means you’ll have all the rights that UK law affords to employees.
Also, because you’re employed by the umbrella company rather than the agency, your employment doesn’t end when your assignment ends. You’ll have a single, continuous employment across all your assignments, even if you work for many different clients or agencies. For credit and reference purposes you have one period of permanent employment from the day you join the umbrella to the day you leave them.
This means you have full employment rights, including sick pay, maternity/paternity pay, access to a workplace pension and paid holiday, and you retain these rights when you’re between assignments.
If you’re lucky enough to be employed by Orange Genie, you’ll also have access to a range of additional benefits, designed with your experience as a contractor and your wellbeing in mind:
For more help choosing the right umbrella, download our free guide, The Top 5 Things You Must Consider Before Joining an Umbrella Company.
The third option is to trade through your own limited company. Your company would have a contract with the agency to supply your services, and the agency would pay your company for the work you complete for their client. As a director and shareholder, you would then have a choice about how you pay yourself, and by using a combination of salary and dividends you can legitimately minimise your tax liability.
Trading through your own limited company is the most tax efficient option for some contractors, but the advantages are only available in the right circumstances. We’d advise you to check carefully to make sure this route is right for you, before deciding to “go limited”. Here are some things to consider:
Will you be inside or outside IR35?
IR35 is legislation designed to prevent “disguised employees” benefitting from the tax advantages of trading through a limited company. An IR35 assessment will look at your contract and working practices to determine whether you’re operating like an employee, or if you’re legitimately in business for yourself. If you’re operating like an employee, or “inside IR35”, you’ll have to pay tax on your contract rate as if it was employment income. Many contractors find that they’re better off with umbrella employment if they’re inside IR35.
If you’re working on a public-sector contract, the end client is responsible for assessing your IR35 status. On private-sector contracts, you are responsible for assessing your own status, for now. From April 2021, the public-sector rules will be extended to include the private-sector.
Some roles are very unlikely to fall outside IR35. For example, supply teachers and agency nurses are likely to be better off with umbrella employment.
How much is your contract rate?
Trading through your own limited company is much more advantageous to high-earning contractors who will get more value from the associated tax-planning opportunities. Generally, we’d recommend the limited option to contractors earning a rate of £150/day or more.
Does this sound like you?
If your contract rate is usually £150/day or more, you usually work outside IR35 and you’ re happy completing a small amount of administration using an online software package, you may be better off trading through your own limited company. Our expert team will be happy to discuss this with you in detail.