Different payment models for UK contractors

Author Penny Parker

december 16, 2024

Contractors in the UK typically work under one of four arrangements: PAYE, via an umbrella company, through a limited company or on a fixed-term contract basis. Each option has its own structure and benefits. Here, we explore these in brief.

1. PAYE day rate

When contracting on a PAYE (Pay-As-You-Earn) basis, you are employed by the agency or end client. Your income is processed through their payroll system, and taxes, National Insurance contributions (NI) and other deductions are taken at source.

Benefits of PAYE

Ease of Administration: Taxes and contributions are handled on your behalf, reducing the administrative burden
Employee Benefits: In some cases, you may have access to benefits such as holiday pay, sick pay and pension contributions
Stability: PAYE contracts often provide more consistent income and protection compared to other models

2. Umbrella company day rate

Under this model, you become an employee of an umbrella company, which acts as an intermediary between you and the client or agency. Your earnings are processed through the umbrella company, which deducts taxes, NICs and a small fee for their services.

Benefits of working via an umbrella company

Compliance and Simplicity: The umbrella company ensures compliance with tax regulations, including IR35 rules and handles all administrative processes
Access to Employment Rights: As an umbrella employee, you may receive benefits such as holiday pay, statutory sick pay and pension contributions
Flexibility with Support: You retain contractor flexibility while the umbrella company handles payroll and tax obligations

3. Limited company contractor

As a limited company contractor, you set up and operate your own business. You invoice the client directly and manage your income and expenses through the company. This structure provides the most autonomy but comes with greater responsibility.

Benefits of being a limited company contractor

Tax Efficiency: Limited company contractors may benefit from tax efficiencies through dividend payments and allowable business expenses
Full Control: You have control over how and when you withdraw earnings and manage your business finances
Professional Credibility: Operating through a limited company can enhance your professional image and is often preferred for high-value contracts

4. Fixed-term contractor (salary)

This is a similar arrangement to permanent employment, however fixed-term contracts last for a specified period (e.g. 12 months) with direct employer engagement.

Benefits of being a fixed-term contractor

Stability: Regular salary and benefits comparable to permanent employees, including pension contributions and paid leave
Full Employment Rights: Fixed-term employees enjoy complete rights and protections against unfair dismissal
Defined Terms: Clear start and end dates facilitate planning, with potential for contract extensions

Choosing the Right Structure

The best contracting model depends on your circumstances, including contract duration, expected income and your appetite for administrative responsibilities:

PAYE suits those seeking simplicity and stability
Umbrella companies provide a balance of flexibility and support, particularly for short-term or IR35-affected assignments
Limited companies are ideal for experienced contractors with high earning potential and a willingness to manage their own finances

Understanding these options enables you to make an informed decision about which structure aligns best with your professional and financial goals.

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Frequently asked questions

If an interim role sits inside IR35, who is responsible for calculating and covering the cost of National Insurance, holiday pay and pension contribution?

In the UK, if a contractor is deemed inside IR35, the responsibility for calculating and paying National Insurance (NI), holiday pay, and pension contributions shifts from the contractor to the employer or the agency that engages the contractor. This means that the end client – or in most cases, Taylor Root – is responsible for deducting the necessary NI contributions and tax from the contractor’s pay and paying them to HM Revenue and Customs (HMRC) on behalf of the contractor.

As a recruitment partner to employers, we alleviate the burden by ensuring that contractors receive the correct holiday pay and pension contributions in accordance with their employment status.

It’s important to note that these responsibilities will vary depending on the specific terms of the contract and the arrangements between the parties involved. Therefore, it’s recommended that all parties seek professional advice and carefully review their contractual terms to understand their obligations and responsibilities concerning tax, NI, holiday pay and pension contributions.

– Inside IR35, responsibility shifts to the end client or engaging agency for NI, holiday pay and pensions
– Taylor Root ensures NI contributions and taxes are deducted and paid to HMRC on behalf of contractors
– We guarantee contractors receive proper holiday pay and pension contributions aligned with their employment status
– Our interim payroll and onboarding team manages these processes efficiently and accurately
– Contractual terms vary, so seeking professional advice is crucial to understand obligations for tax, NI, holiday pay, and pensions

How likely is it that I’ll be able to work via my Ltd Company as an in-house contractor?

Whether or not you can work via your own limited company as an in-house contractor will depend on several factors, including your for-tax purposes, the nature of your work, and the specific requirements of the client or agency you are working with.

In the UK, the IR35 legislation applies to contractors who provide their services to clients through an intermediary, such as a limited company. The IR35 rules are designed to ensure that individuals who work like employees but are engaged through a limited company pay the same taxes and National Insurance Contributions (NICs) as employees. Therefore, if your work falls inside IR35, you may not be able to work via your own limited company and may need to work through an umbrella company or on a PAYE basis. However, if your work falls outside IR35, you may be able to work via your own limited company and benefit from the tax efficiencies and flexibility that come with this structure. This would depend on several factors, such as the level of control over your work, whether you are providing your equipment and materials and whether you can provide a substitute if necessary.

It’s important to seek professional advice and carefully review the terms of your contract to determine your employment status for tax purposes and any restrictions or requirements related to working via your limited company.