Contractor Payment Options: Which is Best for You? - Part 2
Author: Steve Gore
Many of the job seekers who find work through us do so on a contract or freelance basis and those who do so must make some important decisions regarding how they wish to be paid. Do they stick to traditional PAYE or take an Umbrella or Limited Company option?
To help us answer this question we turned to the contractor services or umbrella companies that we work in partnership with, as they are experts in understanding and advising contractors on the best payment option to suit the indivdual.
In previous posts we featured the response of Bar2 who shed some interesting light on the subject. Today's post comes to us from OrangeGenie, another of the contractor service companies we work in partnership with. They have provided this excellent matrix to help contractors compare and contrast the various options available to them, trading options are listed along the top and key considerations down the side:
| LIMITED COMPANY | UMBRELLA SOLUTION | SOLE TRADER | AGENCY PAYE | |
| Employment status | Limited Company is a separate legal entity to the person forming it | You become an employee of the Umbrella Company and benefit from statutory employment rights such as SSP/ SMP and holiday pay | You have no separate legal identity from your business | You become an employee of the agency and benefit from statutory employment rights such as SSP/ SMP and holiday pay |
| Taxation implication | Greater opportunity for tax planning | All tax and NI is deducted before payment with no additional taxes to pay | All monies earned in the tax year will be taxed at the applicable Income Tax Rate | All tax and NI is deducted before payment with no additional taxes to pay |
| Expenses consideration | A wide range of expenses can be claimed | Expenses can be claimed in line with the umbrella company’s dispensation agreement with HMRC | A wide range of expenses can be claimed | Generally no expenses can be claimed |
| IR35 status | IR35 Considerations | IR35 is irrelevant | IR35 is relevant | IR35 is irrelevant |
| Suitability | Not suitable for short term or low value contracts under £25k per annum and where IR35 applies | Great starting point for first time contractors. Ideal for short term contracts. | Not ideal from a tax perspective long term | Ideal for short term contracts or low valued contracts |
| Insurances required | Professional Indemnity Insurance will be required at an additional cost | Professional Indemnity Insurance, employer and public liability insurance is included | Professional Indemnity Insurance will be required at an additional cost | You are typically covered by the insurance policy set up by the Agency organisation. |
| Salary payment | You retain complete control of your financial affairs | The Umbrella company collects funds from the client or agency and then pay you and provide you with a payslip | You retain complete control of your financial affairs | The Agency collects your money from the client or agency and then to pay you |
| Ease of use | You will need to raise your invoices, record your expenses and arrange to transfer funds to yourself | Very easy to use, simply submit your timesheet and expenses | You will need to raise your invoices, record your expenses and arrange to transfer funds to yourself | Submit your timesheet and wait to be paid. |
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