Income Payment Options – Limited Company or PAYE?

Income Payment Options Update: You are able to acquire apply for a Limited Company while on a Tier 5 Youth Mobility Visa.

So you’ve made the move over to the UK or you might be looking into some jobs. Recruiters and employers are going to ask you if you want PAYE or have a Limited company. Your income payment options boils down to personal choice.

Before I begin, I’m not expert on these matters. I had assistance in deciding what was best for me by the awesome guys at Income Made Smart (IMS). After consulting with IMS about my income payment options I had a clear idea of which one I wanted to do. I’ll talk about these guys later on.

A Limited Company is going to yield better take home pay over an Umbrella arrangement. Read on to find out why.

Umbrella Company

An umbrella company is essentially a way to contract your services for a small amount of paperwork. The ‘umbrella company’ who you contract through manages all invoicing, chasing payments, calculating tax and making payments into your bank account.

Your only obligation is to make sure you submit your timesheets and expenses routinely to ensure smooth transactions.

I personally choose the Limited Company but a close friend who travelled to the UK with me contracted under an umbrella company and she said it’s very simple to follow. It is considered the hassle free method to contracting but you’ve just made the move to the UK to do ‘ALL THE THINGS!’ why not make the most of your money? It is the simpler of the two income payment options.

Changes to how the Umbrella Companies are run and a clamp down on Limited Companies will take effect in 2016. You will not be able to claim any expenses under an Umbrella Company.

Limited Company

By setting up a limited company you are the sole director of a one man/woman company and as such you control the running of the company and its bank account which gives you greater flexibility for your finances. You will need to setup a name for your limited company and company bank account.

By contracting through your own limited company you have control over how you want to be paid and (with advice) you can set your company up to provide you with the most tax efficient earnings. Unlike a permanent or umbrella employee, you pay yourself in the form of a basic salary (typically low), and the remainder is payed to you in the form of dividends. Dividends are not subject to National Insurance Contributions, which results in a significant tax saving.

Fortunately, most of the legwork involved in running a company can be taken on by a specialist contractor accountant, although as a director you are responsible for meeting the company’s obligations. For more detailed information on setting up your Limited Company please contact IMS who can assist you in setting this up. This option is the best of the two income payment options in my opinion.

The Differences

The main savings with a Limited Company over an umbrella are around National Insurance and the Flat Rate VAT Scheme.

An umbrella company is not as tax efficient compared to a limited company, however it does represent a quick and easy way to start working and to test the waters if you have never contracted before. Contracting has its pros and cons and it’s not for everyone.

I’ve created an infograph of the pros and cons of an umbrella and limited company below:

I highly recommend if you are earning more than 14 pounds/hr or roughly 27k. Hire an accountant and go down the path of the Limited Company.

Hiring a Helping Hand

If there’s one single thing you could do to ensure that your life as a limited company contractor is as stress-free as possible, it is to find an efficient, communicative, and accurate contractor accountant.

In fact, your accountant can take care of almost all of the hassle associated with running a company. They will deal with all your tax affairs, run your monthly payroll, and produce your annual accounts.

I highly recommend Income Made Smart (IMS) for situations like these.

From the first week I landed in the UK I was introduced to Sam, a friendly New Zealand employee from IMS who was also ‘fresh off the boat’. Sam was incredibly helpful and and guided me each step of the way in the process of the limited company setup. He made the process incredibly smooth even when I accidently missed my business bank appointment and it had to be rescheduled. And once I had landed my first contract the team at IMS showed me how to use their systems showing me the most efficient way to run my limited company. They really made it hassle free.

Further Reading

So now that you’ve read about each of them… umbrella or limited company? I’ve given you the pros and cons of each one. I may be a little bias but it numbers support me and I’ve also provided an accountant to get you started. They do either umbrella or limited company setups.

I’ve only just touched on these two contracting types there is a lot more you need to read about before deciding which one is right for you. Here are some resources to help you decide:

Limited Company Calculator

Umbrella Calculator

Plug in your prospective hourly rate into either the umbrella or limited company calculator to show you the earnings, note the results down and then repeat for the respective calculator and compare the results.

Or alternatively contact IMS