Limited, PAYE or an Umbrella Company?
Your business structure and the financial status of the organization determine what type of payment route you need. You can choose the system you need by having a detailed overview of the advantages and disadvantages of all the three methods limited, umbrella and PAYE.
Limited Company
It is one of the most popular business organizational structures in the United Kingdom. The system helps you in creating your business as an individual body. You and your shareholder can keep your finances secure if you start a business with this structural model. However, with many benefits, there are some financial obligations for the contractor. Work-related to IR35 may limit your advantages as a contractor in a limited company structure. In that case, you must create your business on an Umbrella or PAYE structural model.
Advantages
- Minimum risk on personal assets.
- A business company will be considered as a separate entity.
- The increased professional image will allow the expansion of your business and will bring in different shareholders and investors.
- Retention of the surplus financing for growth in the future.
Disadvantages
- You cannot create a limited business company if considered bankrupt or are undischarged of it.
- Disclosure of personal and company data.
- Withdrawal of money or cash from the business may require strict withdrawal procedures.
- Annual filing of the tax returns to HMRC.
PAYE
In a PAYE system, the agency has complete control over the processing of the company however, there is a full-employment status for the contractor or the worker. It means that the agency will handle all the payments to the contractors. However, you will have to submit the payments and deductions of the workers to the HMRC when you run the payrolls.
Advantages
- There is no intervention of any third party if you have created a business on the PAYE system.
- Workers or contractors will get paid sick/paternity leaves.
- Pension and paid holidays will be allowed to the workers.
- As an employee, you can benefit as all your taxes will be handled by your employer.
Disadvantages
- Your agency will have to stay updated and comply with updated employment laws.
- You will have to update about employee’s payment and deduction information to HMRC whenever you make payroll.
Umbrella Company
Payrolls and all administrative works like taxes and accounts are handled in this system. This system works as an intermediate medium between a contractor and a client. You, as an employer, hire the contractors through the umbrella system and pay the umbrella company to provide payrolls to the contractors. Deduction of the fee of the company and taxes is then done by the company itself.
Advantages
- It can comply even if your work is related to IR35.
- The agency itself manages the accounts.
- It is cost-effective for administrative tasks.
- The contractors get pensions and paid holidays.
- Contractors can apply for loans due to recorded employment status.
Disadvantages
- It is non-beneficial for the agency as there is third-party intervention.
- The agency may face an issue due to the complex payroll system.
- Complicated expenses of the taxes may be confusing for the agency.
