What are my Employment Options as a Contractor?

If you’re thinking about making the leap to contracting, you certainly won’t be alone. What’s more, you’ll already be in high demand as more and more businesses are turning to contractors to plug the skills gaps they’re currently facing.

Before you get there, you’ll make a number of important decisions that will shape your future career. The first of these is which contracting route to choose.

With so many options, there’s plenty of research out there to help you find which one will work for you. Luckily, help is at hand so you won’t have to sift through everything by yourself.

To help lighten the load, we’ve created this simple guide summarising the main advantages and disadvantages of each.

What are my employment options as a contractor?

As a contractor, you’ll be able to choose between four main options. They are:

Umbrella company
Limited company
Agency PAYE
Sole trader

Here’s what they’re all about:

Umbrella Company

This is the ideal option if you’re brand new to contracting, as it gives you the freedom and flexibility to suit your new WorkStyle. You’ll also receive the same rights and benefits that all permanent employees enjoy, meaning you get the best of both worlds.

As a first time contractor, you’ll probably want to focus on enjoying your career without having to worry about additional administration duties. Umbrella companies take care of all your Income Tax and National Insurance obligations so there’s no need to worry.

In addition, the umbrella company will handle all invoicing and payroll duties, ensuring you get paid accurately and on time.

Good if:

You’re working on short-term assignments from one day to six months
You want to test the water before committing to a contracting career
You want to remain clear of IR35

Not so good if:

Your assignments last longer than six months
You’re happy taking on responsibility for your accounts
You can’t claim many expenses

To find out more about this option, take a look at our guide to umbrella companies.

Limited company

The limited option is a popular choice for many contractors, as it offers greater flexibility and tax efficiency. As a company director, you’ll be able to pay yourself a combination of salary and dividends to reduce your tax liability.

What’s more, personal and company finances are classed as two separate entities, meaning your personal liability for any business debts is limited.

Of course, with power comes responsibility. Running a limited company brings more administration.

Thankfully, help is at hand, as you’ll be able to choose from a wide range of specialist contractor accountants, like our sister company Caroola. They’ll assist you with your accounts, check your IR35 status and ensure you pay the correct amount of tax.

Despite this extra help, the limited company route still involves more paperwork than contracting through an umbrella. It’s therefore only the best option if you’re willing to take on additional duties in return for being your own boss.

Good if:

You work on multiple projects
You want to increase the amount you take home
You’ve decided to commit to contracting for the long-term
You’re happy to take on the extra responsibility
You have a specialist contractor accountant
You want to be your own boss
You claim a lot of expenses

Not so good if:

You don’t want any hassle or additional responsibility
You struggle with the basic principles of tax legislation
You want to pay tax as you earn instead of a lump sum

Agency PAYE

This option is sometimes offered by recruitment agencies and will look after your tax and National Insurance contributions on a Pay As You Earn (PAYE) basis. It might sound similar to the umbrella model, but there are a few key differences to be aware of:

You won’t be employed by the agency, meaning you won’t receive employment rights as you would with an umbrella

Your take home pay might be lower than the income (including reimbursed expenses) you’d be paid by an umbrella company

Good if:

You’re looking for occasional temporary jobs, such as secretarial or bar work
You won’t incur additional expenses when completing the assignment
You don’t want to sort out your tax and National Insurance obligations

Not so good if:

You don’t want to be tied to one agency
You change assignments frequently
You want to claim expenses

Sole trader

This final option is often considered to be the simplest route, but it’s not without its drawbacks. Like limited company directors, sole traders must register as self-employed and complete an annual self-assessment tax return.

As a sole trader, you’ll be responsible for finding your assignments and will have to pay tax on all your income. Crucially, you’ll also be personally liable for any debts run up by your business – meaning your personal finances could be at risk if something goes wrong.

Good if: