As an agency we are often asked by new registrations for an overview of the key differences between working as a contractor through an Umbrella company, PAYE (Pay As You Earn), or a Limited Company in the UK.
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Please keep in mind that the tax laws and regulations can change, so it's important to seek professional advice for the most up-to-date information but for an general overview we have broken down a comparison:
Umbrella Company
Taxation: Under an Umbrella company, you are treated as an employee for tax purposes, the umbrella company is your employer and will be responsible for making payments to you and queries about your payslip. Income tax and National Insurance Contributions (NICs) are deducted at source so you get paid similar to if you were a permanent employee with all deductions taken off you and nothing more to pay! It is recommended to use regulated Umbrella Companies and if the take home sounds to good to be true, it might just be.
Administration: Minimal administrative work. The Umbrella company handles tax, NICs, and payroll, reducing administrative burdens.
Cost: There is typically a fee for using an Umbrella company's services, which may reduce your take-home pay, this is generally upwards of £15 per timesheet.
Claimable Expenses: Depending on the sector you are working in, and if it falls inside or outside of IR35 legislation, public/private work, you can sometimes claim certain work-related expenses, such as travel and subsistence, potentially increasing your take-home pay but you will need to confirm this per assignment and with your umbrella company.
PAYE (Pay As You Earn)
Taxation: Similar to an Umbrella company, PAYE follows traditional employment with taxes deducted at source. Often the rate you discuss would be inclusive of all employer costs and that is why the PAYE rate is a lower amount, as it is the hourly rate you earn after employer costs, but before personal tax. This is how you are paid if you work for a contract where direct engagement is utilised or if you request PAYE from your agency.
Administration: Minimal administrative work, as your employer handles tax, NICs, and payroll.
Cost: Generally, there are no additional costs beyond standard income tax and NICs.
Claimable Expenses: You may be able to claim some expenses, but the rules are stricter compared to working through a Limited Company.
Limited Company (Personal Service Company - PSC):
Taxation: You have more control over your tax affairs. You pay corporation tax on company profits, and you can choose when and how to pay yourself (salary and dividends).
Administration: More administrative work involved, including company registration, annual accounts, and tax returns.
Cost: There may be higher setup and ongoing accounting costs compared to the other options. Most healthcare workers will use an accountant to handle the administrative duties for them.
Claimable Expenses: You have more flexibility to claim expenses, but they must be wholly and exclusively for business purposes.
Specific to Healthcare Workers:
Healthcare workers may have some unique expenses, such as professional registration fees, uniforms, and mileage. These expenses can often be claimed, but the rules vary between the three options.
Different NHS trusts and healthcare settings may have specific payment arrangements such as Direct Engagement only, this will be covered separately.
Overall Considerations:
The choice between these options depends on your personal circumstances, financial goals, and willingness to handle administrative tasks.
It's crucial to consult with an accountant or tax advisor who specializes in healthcare contracting to ensure you're making the most tax-efficient choice and it is worth remembering that some settings you work in will require you to be paid in a certain way. For example, Trusts that have engaged with a Direct Engagement Model will require you to be paid PAYE through that model and not have the funds released by your agency. We will cover these in a separate blog.
Please consult a financial or tax professional to get tailored advice based on your specific situation and any recent changes in tax legislation.
