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Getting Paid


The Difference to Being Employed

As a permanent member of staff you may well have been offered the opportunity to divert some of your earnings into a pension, however, that aside, you probably haven’t ever had to think about how you will be paid.

You just agree to a job at a certain salary level and receive a payslip once a week/month telling you how much tax you have paid and how much will be paid into your bank account. Simple.

As a contractor things are not so simple. You have five options available to you:

Agency PAYE

Umbrella PAYE

Ltd Company

Sole Trader

Trust/Loan Scheme

Agency PAYE

Some agencies (not all) offer a payroll option for contractors.

If you do happen to be working for an agency that will pay you through their payroll then your entire income will be subject to full PAYE and National Insurance contributions. You will not be able to offset any travel (or other) expenses against your income even though you will likely incur them.

This is arguably the easiest option available to contractors as you simply send off a timesheet and you are paid. All Tax and National Insurance is deducted so you have no need to put money aside for Tax at a later date.


Umbrella PAYE

An Umbrella Company is a company that will act as an employer to you (and other contractors) for the duration of your contracting career – unless you decide to leave.

This option is very popular with first time contractors as it allows them to adapt to life as a contractor before taking the plunge and attempting to run a Ltd Company while they are in the early stages of contracting.

Other advantages of using an Umbrella Company are that you have no IR35 risk and the fact you are employed by the Umbrella Company means that this is suitable for any contract-length whether it be short or long-term.

The Umbrella Company option (like agency PAYE) is not a very tax-efficient option. You are not able to claim travel (or other) expenses, meaning all of your contract income is subject to Tax and National Insurance.

Other disadvantages of using an Umbrella Company are that you are relying on somebody else (in addition to your Agency/client) to pay you, which can sometimes result in delays. Also without a Ltd Company you are unable to create a brand identity within the marketplace.

There are hundreds of Umbrella Companies within the UK so picking the right one can be tough. Since expenses for Umbrella Company employees were removed in April 2016 every Umbrella Company should be offering the same overall retention, the only factor that should result in differing retentions is the fee structure of each Umbrella Company.

One additional factor to consider is how the Umbrella Company charge their fees. Some will charge a weekly/monthly fee whereas some will charge by the timesheet. If you submit weekly timesheets then it would make sense to look for an Umbrella Company that charge a monthly fee rather than by the timesheet for example.

Ltd Company

Setting up and running a Ltd Company is by far the most popular option for contractors and this is why we have dedicated a whole section (Running Your Own Business) to this subject.

The advantages over an Umbrella Company that this option gives you are:

  • The chance to build a reputable brand and, over time, be the first port of call for clients and agencies when looking for contractors.
  • A higher retention than through an umbrella company. You can remunerate yourself in numerous ways (Dividends, Pensions, etc) meaning that you don’t have to pay full Income Tax and National Insurance on your contract income.
  • Assuming you are outside of IR35 you are able to claim business expenses against your income.

Disadvantages are:

  • Responsibility and Administration. You will have to ensure you pay the correct tax and submit numerous returns to HMRC over the course of a year.
  • IR35 Legislation. Assuming you wish to take dividends out of the company you will need to be deemed ‘outside of IR35’.

Sole Trader

A very small percentage of UK Contractors operate as a Sole Trader. This is typically down to three reasons:

  • As a Sole Trader you are personally liable for any debts/liabilities that may accrue. This means you are putting anything you own at risk, such as your house, car, etc. On the other hand, running a Ltd Company results in you being a Director and the Ltd Company is, by law, a separate legal entity and liable for its own debts.
  • The Income Tax (Earnings and Pensions) Act 2003 states that where an individual personally provides, or is under an obligation personally to provide services to an end client via an agency, and that individual is subject to supervision, direction or control, the income received by the individual worker under the contract is to be treated for income tax purposes as employment earnings. Most Agencies don’t want this hassle/worry so will insist that they pay into an Umbrella or Limited Company.
  • A Sole Trader does not have the option to draw dividends, they have to pay Class 2 National Insurance Contributions at the set rate, and Class 4 National Insurance Contributions and Income Tax on the remaining profits.

Trust/Loan Scheme

Over the years contractors have been tempted by a lot of different types of scheme in order to maximise their take-home pay and, in some cases, eradicate any IR35 risk and administration.

It is very hard for us to comment on these schemes as we are not qualified to do so. It is our opinion that a Tax Barrister at QC level is the only type of person qualified to comment on these.

A couple of facts that we feel are worth pointing out:

  • Thousands of contractors have had to pay tax liabilities for using schemes having been issued with Accelerated Payment Notices (APN’s). This has led to bankruptcy in some cases.
  • Some scheme providers have disappeared and left contractors to fight HMRC on their own.


On the other hand:

  • Some scheme providers have supported their clients and defended their scheme successfully against an HMRC enquiry.
  • HMRC have had to withdraw batches of APN’s issued incorrectly on two occasions, once meaning over 2000 were withdrawn.


We would recommend that before entering any type of scheme you have full detail of how and why it works. Asking the following questions would be a good place to start:

  • How recently have you obtained QC Opinion? Does it include the Instructions to Counsel? Can I see both?
  • Does your scheme carry insurance? Can I see proof?
  • Can I speak with clients that have used you for a significant period of time?
  • Is there a reason for using the scheme for any purpose other than to avoid tax?

If you receive answers to these then engage a tax consultant (not accountant) to review the scheme before you make a decision to go ahead.