Contractors Unlimited

Operating as a Contractor

Three Ways to Operate

  • Through your own Limited Company
  • Through an Umbella Company
  • PAYE through your selected Agent

Which Should I Choose?

This depends on your individual circumstances and your approach to life. Most contractors work through their own limited company because the tax advantages of working this way far outweigh the other methods. However, the other methods suit particular circumstances. Before deciding you should have a chat with your Accountant so your particular circumstances are considered.

Limited Companies

To set up a limited company costs around £100 and only takes a few days. Companies who offer this service advertise in Exchange and Mart, Daltons Weekly, etc. You can arrange this yourself by applying direct to Companies House, but this takes longer and is generally not worth the few pounds you will save.

Your Accountant may set up your company on your behalf for a small charge, or free if you agree to stay with him for a few years.

One thing your company will need is a company name. There are a few rules concerning names. These can be seen on the Companies House website. You can also use the site to check if the name you want to use is already being used.

All good book shops will sell a range of books that will allow you to bone up on forming a limited company, before you speak to your Accountant. We have listed a few on the left below, click the images to read a review and/or make an order.

I've Got a Company, Now What?

A company needs a minimum of one Director, and also a Company Secretary.

Generally, you will want to be the Director. After all, it is your company so you want the freedom to control it your way. As always in life, freedom brings responsibilities.

There are many useful books available which will help you understand your new found responsibilities as a Company Director. For example The Company Director's Desktop Guide

The Company Secretary has a legal requirement to record company meetings and perform administrative duties. Although this sounds onerous, for a contractor's company this will involve very little work throughout the year. A common choice for Company Secretary is the contractor's partner, or even a parent.

You now have their next birthday present sorted out - The Company Secretary's Handbook.

Umbrella Companies

An umbrella company is a single, managed limited company through which many contractors simultaneously operate their contracts. The umbrella company carries out all the administration normally associated with running a limited company. They will issue invoices on the contractor's behalf, collect payments from clients/agencies, calculate tax and N.I contributions and pay the contractor their net pay. In other words, by becoming a client of an umbrella company, you also become an employee of that company.

Obviously, all this administration costs money and the umbrella company makes a charge. Additionally, umbrella companies do not tend to offer the same tax advantages as a limited company. However, by removing all the administrative burdens, responsibilities and hassles of running a company they are attractive to many contractors; especially those who are new to contracting, or who expect to spend only a few months as a contractor.

Umbrella companies have evolved recently to include Managed Companies and Composite Companies.

Composite Companies

These companies offer the usual services and allow the contractor to be a shareholder of the Composite Company. There are many ways in which these work. A common way is for the contractor to receive a base salary with the balance of their income going into a shareholding pot. The contractor takes his share of the pot at a time that provides tax advantages.


This is perhaps the easiest of all options, though not all agents offer this service. In this scenario, you become Pay As You Earn (PAYE) through your agent's own payroll service. Although it is the easiest option, it is also the least beneficial.

First the agent will make a charge, then you will pay full tax and national insurance (NI) contributions on all your earnings. This option does not allow you to claim valid business expenses (e.g. travel, training etc.) which would normally help to reduce your tax and NI liabilities.

Having said all that, many contractors do choose this route, because it suits their circumstances.

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