Umbrella, Ltd or Agency PAYE? Where do I start?

18th July 2016 Facebook Twitter LinkedIn Google+ Articles

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Taking that leap from permanent employment to contracting can sometimes be a somewhat daunting prospect. You may need to enlist the help of a recruitment agency to help source your assignment, you may have to start thinking about your CV, new skills, self-promotion and much, much more … but one thing you will always need is a mechanism for getting paid.

So let’s take a look at the basic scenarios you should start to consider …

The first thing you will need to look at is the duration of your assignment: how long is it likely to last? OK, so if your work is ad hoc, i.e. a few days here and there with a variety of different clients, then you could look at two options: either working as self-employed and managing your own finances, or alternatively via PAYE on the recruitment agencies’ books. In 2014, the government introduced Onshore Employment Intermediaries: False Self-Employment, and unfortunately if you choose to work via a recruitment agency then it could be perceived that you are utilising someone else’s skills to source the work for you, and thus you may fall under the False Self-Employment legislation.

So, what if your assignment is longer term? At this point you have a few more options open to you.

First, there’s the straightforward route of agency PAYE. This may be an easy way forward with quick set-up; however, some agencies may not have that option available for you, so what else can you look at?

Well, there is the option of umbrella; however, most umbrella companies have a minimum term for an assignment of, say, four weeks. If you decide to go down this route, you become the employee of the umbrella company and as such the minimum term will probably match the notice period you will be required to give the umbrella if you decide to leave their employment. It is therefore advisable that you check through all the paperwork before you sign on the dotted line. If you are given the option between agency PAYE and umbrella, you should see a difference between the rates you are given for each option. You should see a higher rate to operate via an umbrella or your own limited company to cover the additional costs that you wouldn’t incur via standard agency PAYE.

So how do you choose between umbrella and Ltd? This choice will depend on a few different factors: How long is the assignment? What will you be earning? How much work do you want to do? Are you looking to continue contracting as a long-term career?

If you want the hassle-free option, which allows you to concentrate on your assignment without the stresses and strains of running your own business, then umbrella may be the route for you. You are paid via PAYE and you receive statutory rights exactly the same as if you were employed on a permanent basis. Umbrella may also be the option to get you on track down the contracting route; once you are all settled in you can look to make that move across to Ltd.

So as a general rule, if you have a contract that is less than nine months and an annual contract rate of less than £48,000, then umbrella may be the most cost-effective route for you.

If, however, you are looking at annual figures in excess of £50k and a contract length of more than nine months, or multiple assignments covering a similar period, then Ltd could also be an option for you. You will have to understand that this is a commitment on your part to operating your own business for at least 12 months, working closely with your accountant to ensure that you are operating correctly with regards to IR35.

Set-up for a Ltd company can sometimes be time-consuming, whereas umbrella can be done relatively quickly.

So at the end of the day, the choice as to how you want to operate is yours, and it is something you need to make sure you get all the facts for so you don’t end up with any nasty surprises.

Lucy Smith is Managing Director for ContractorUmbrella Ltd, one of the UK’s most trusted umbrella company in the UK.