After you have agreed with an agency on the terms of your contract, the recruitment agency will require you to have arranged a payroll solution to process your payment.
There are three popular ways this – to use an umbrella company, a limited company or through PAYE (via the recruiters/client).
Umbrella Companies – Pros and Cons
All three options have there own advantages and disadvantages but whether or not its right for you for contractors and the choice comes down to what is most suitable for your circumstances. What is right for one contractor may not necessarily be right for another but it can depend on circumstances such as how long the contract will last (is it temporary or will it be a long-term project).
It is also a question of how much responsibility the contractor wants to take on, for example a limited company will provide greater freedom but will also mean you are responsible for all aspects of the agreement – chasing payments, dealing with legal and tax issues etc.
Umbrella companies are generally seen as the simplest way of ensuring that all your taxes and the administration side of the business is taken care of so you can focus on your work. This kind of organisation would also be able to provide you with the relevant insurance policies to provide you with protection should there be any problems – all of which you would normally have to sort out for yourself should you decide to operate through a limited company. However, this kind of assistance comes at a price with many umbrella companies with many charging a fixed fee of upwards of £100 per month whereas some can even charge a small percentage of each invoice (often around 5%).
Limited Company
Choosing a limited company option involves incorporating a company that you as the contractor would be the director of, and setting up a bank account for your new company. If you decide to do so, you will also be required to apply to become VAT registered.
The main benefits here are obviously that you will have complete freedom to operate your business how you see fit and the fact that you will not have to pay a percentage or fixed fee for the services of an umbrella company. However, that doesn’t mean there aren’t fees associated with having a limited company for example hiring an accountant to submit your tax returns or a bookkeeper to keep track of your finances.