Limited Company vs PAYE Umbrella Company
Which option is best for you?
Since the introduction of the Managed Service Company (MSC) legislation in the budget 2007, the only way an independent contractor can comply with this legislation is to set up his or her own personal limited company or to use the services of a PAYE umbrella company.
Limited Company
A limited company in the United Kingdom is a corporation whose liability is limited by shares (Ltd) This is the most common form of privately held company.
By setting up your own limited company, you become a Director who is responsible for the affairs of that company.
Pros
- The most tax efficient way of working providing your contract is outside IR35
- You are your own boss and have complete control over the company and its operations
- A wider range of tax benefits are available; including payment by dividends; that attract a lower rate of tax
- Ideal for contractors with complex financial affairs
Cons
- You are responsible for maintaining accurate company accounts
- Either yourself or your company secretary will be responsible for ensuring compliance with all company matters
- You will be responsible for invoicing the client, all aspects of credit control and maintaining an accurate accounting system
- You must ensure that all company returns and accounts are filed by their respective due dates. Failure to do so, may give rise to late filing penalties being born against the company
- You will need to employ the services of a reliable accountant
- You will have to maintain various comprehensive Insurance Policies e.g. Employers Liability, Public Liability and Professional Indemnity Insurance
- You will need to complete a self assessment for tax each year, getting this wrong can prove detrimental to your tax status in the long run
Managed Service Company Legislation has made the Limited company route more high risk; particularly for individuals that seek third party assistance with the general daily operations of the company. If it is deemed that the company is a Managed Service Company, then you may be liable for additional retrospective taxes. Many contractors will labor with these responsibilities; therefore setting up and administering your own limited company should not be entered into lightly.
PAYE Umbrella Company
A PAYE umbrella company employs independent contractors who work under temporary contract assignments. The PAYE umbrella company issues invoices to a recruitment agency (or client) and, when payment of the invoice is made, will pay the contractor through PAYE. All Tax and National Insurance is deducted at source, making the PAYE Umbrella Company the safest way to contract.
goumbrella is a PAYE Umbrella Company
Pros
- Great for first time contractors who require a quick and easy start up to contracting
- Ideal for contractors who require a cost effective management solution for short term or fill in contracts between permanent assignments
- The threat of IR35 is removed
- Removes the implications and legal responsibilities of running your own Ltd Company
- All legal, contractual and financial affairs are dealt with by the PAYE umbrella company
- You don’t accrue fees when you are in between contract assignments
- The PAYE umbrella company takes care of all accountancy, administration and taxation matters
- You won’t have to chase for payment of o/s invoices. The PAYE umbrella company should ensure that invoice payment deadlines are met and you are paid regularly
- You have full employee status and entitlement to all statutory employment rights
- Most PAYE umbrella companies will include a full range of insurance cover as standard
Cons
- Perhaps not as tax advantageous as operating your own limited company (but then this is subject to certain criteria being met, particularly the application of IR35)
- Unless you opt for same day payments, there will be a slight delay (typically 3 working days) before you receive cleared monies into your account, as it needs to pass through the PAYE umbrella company bank account. This presents an element of trust on your part due to the control the PAYE umbrella company has on the money
SUMMARY
There are a number of factors you need to take into consideration when choosing the right payment vehicle.
There is no right or wrong solution, both structures are perfectly viable, but depend on your working arrangements as to which is best suited to your personal circumstances and requirements.
