Contracting in 2021: What are your Options?

Contracting Options: What you Need to Know

There are 3 main routes open to contractors, PAYE, umbrella, and limited. Each option has its benefits and drawbacks, with some contractors being better suited to some options than others.

To help you find the best option for your contracting career in 2021, Umbrella Supermarket has put together this comprehensive guide on what your options are and how to pick the best one for you.

Option 1: PAYE

One option available to contractors in 2021 is to operate through a PAYE agency.

PAYE simply refers to pay-as-you-earn which is the most common form of taxation in the UK. Here, tax and National Insurance contributions are taken from a worker’s salary before it is paid to them. This is in line with current UK tax bands as follows:

  • Personal allowance (tax-free) – Up to £12,500 a year
  • Basic rate (20%) – £12,501 to £50,000 a year
  • Higher rate (40%) – £50,001 to £150,000 a year
  • Additional rate (45%) – More than £150,000 a year

If you live in Scotland, the income tax rates are slightly different as follows:

  • Personal allowance (tax-free)– Up to £12,500 a year
  • Starter rate (19%) – £12,501 to £514,585 a year
  • Basic rate (20%) – £14,586 to £25,158 a year
  • Intermediate rate (21%) –£25,159 to £43,430 a year
  • Higher rate (41%) - £43,431 to £150,000 a year
  • Top rate (46%) - more than £150,000 a year

The PAYE system in Wales is based on the following tax bands:

  • Tax-free personal allowance: up to £12,500 per year
  • Basic rate (20%):£12,501 - £50,000 per year
  • Higher rate (40%):£50,001 - £150,000 per year
  • Additional rate (45%):over £150,000 per year

A contractor can work under a PAYE agency that will employ them, pay them a salary, and tax them under the PAYE system.

PAYE contractors will still take on contract work, however, the agency will source and secure work for them, meaning they don’t have a say over which contracts they take on and when.

Option 2: Umbrella

Another route contractors can take is to work through an umbrella company.

When it comes to PAYE vs umbrella, the two do not actually differ in terms of how much tax the contractor will pay under each. Umbrella contractors are similarly employed by the company, paid a salary, and taxed through the PAYE system.

However, one big difference is how the contractor is free to operate.

Unlike under a PAYE agency, with an umbrella company, the contractor can choose which contracts they work on and when. For this reason, many contractors favour the umbrella company route as it gives them the freedom and flexibility of contracting, coupled with the security of having a salary.

Another difference between PAYE vs umbrella is that with an umbrella company, a contractor is given one handy tax code and continuity of employment. This is good news for those looking to secure a mortgage or get a loan. However, with the PAYE option, with every new contract the contractor takes on, they are given a new tax code.

Finally, another key difference is that most umbrella companies allow contractors to claim back legitimate business expenses. This is great news for contractors as these can be claimed back on their tax bill. However, this isn’t usually an option for PAYE contractors.

That is what the umbrella company route looks like, now let’s look at the final option – working under a limited company.

Option 3: Limited Company

The third and final option is to operate under a limited company.

This is completely different from both PAYE and umbrella, requiring the contractor to set up a limited company and be self-employed.

As these contractors do not work through an agency and are therefore not employed, they will not pay tax through the PAYE system like PAYE and umbrella contractors. Instead, with the limited company route, a contractor is responsible for carrying out self-assessment and making their own tax and National contributions after they have been paid their contractor fee.

Many contractors are drawn to this option as it gives them a great degree of freedom over their contracting careers. However, it is also worth noting that this route requires the contractor to take on the responsibilities of running their own business, calculating and paying tax and National Insurance contributions, finding and sourcing contract work whilst getting on with the contract at hand.

Another drawback to this route going into 2021 is the upcoming changes to IR35 legislation, under which thousands of limited company contractors are set to be badly impacted.  Although IR35 originally only applied to the public sector, from April 2021 it is set to be rolled out to the private sector too.  This was set to come into effect from April 2020 but has been delayed due to the COVID-19 pandemic.

As a way to avoid IR35 legislation, many of these limited company contractors are now considering their options in 2021, with many looking towards the umbrella route as an alternative. After all, IR35 does not apply to umbrella contractors.

If you are a limited company contractor considering making the move to an umbrella in 2021, or whether you are new to contracting altogether and think the umbrella route would be the best for you, the next step is to find the best umbrella company for you.

Find the best umbrella company with Umbrella Supermarket’s umbrella calculator 

The umbrella company route has become an increasingly popular option for contractors going into 2021, offering them a wide range of benefits, the security of employment, and the freedom of contracting,

To help you find the best umbrella company, Umbrella Supermarket’s umbrella calculator is here to help. Simply enter your details and contractor preferences, and we’ll generate a list of the best-suited companies in just 2 minutes. Ready to see what we can do for you today?

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There are many advantages to using an umbrella calculator for contractors.

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Umbrella vs Limited Company: What to know when making the move this new tax year

The 6th April 2021 marked significant changes to IR35 legislation which impacted thousands of self-employed, limited company contractors operating within the private sector.

In light of the changes that have now rolled out, many limited company contractors are understandably considering their options and thinking about making the move to umbrella this new tax year.

To help make the decision that little bit easier, in this guide Umbrella Supermarket outline what contractors need to know about making the move from limited company to umbrella in 2021, to help you get on the right track.


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Umbrella Company vs PAYE: What should you choose?

Umbrella company vs PAYE is a question asked by thousands of contractors.

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How can I avoid IR35?

As a contractor, you will most likely know about IR35 and upcoming reforms from April 2021.

These changes to IR35 legislation are set to badly impact many self-employed contractors in the private sector, so thousands are understandably worried. After all, getting caught out by IR35 can mean you end up paying more in tax than you need at the same level as an employee, without receiving the benefits of being employed, such as statutory rights.

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Umbrella Company Fees: How Much Should You Pay?

When deciding which umbrella company to work with, the fees they charge will inevitably play an important role in the decision-making process.

Umbrella company fees are taken directly out of the contractor’s income, so it is only natural that contractors want to ensure they are getting a fair deal.

To help contractors understand umbrella company fees, from how they are charged, what they will receive in return, and how much they should be paying, Umbrella Supermarket outlines everything there is to know about umbrella fees in this handy guide.

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Pros and Cons of Limited vs. Umbrella

Big reforms to IR35 legislation are set to come into motion from 6th April 2021 which will impact the thousands of self-employed, private-sector contractors out there.

For this reason, many of the contractors that currently operate through a limited company will be considering the umbrella company route as an alternative.

If this is true for you, it’s important to do your research to find out whether limited company vs umbrella is the best option for you in 2021.

To help make the decision that little bit easier, in this guide Umbrella Supermarket outline the key differences between limited vs umbrella, so you can get on the right track.

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What Does the 2021 Budget Mean for Contractors?

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Contractor’s Guide to IR35 in 2021

From April 6th 2021, reforms to IR35 legislation will come into force, impacting the lives of thousands of self-employed contractors.

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How to Compare Umbrella Company Fees

If you are considering joining an umbrella company in 2021, or have been contracting through one for a while and want to ensure you are getting a good deal, it is important that you know how to compare umbrella company fees.

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Job Retention Scheme for Contractors in 2021

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Fortunately, many of these contractors are eligible for the government’s Job Retention Scheme otherwise known as furlough, introduced to offer financial support for businesses and workers. This has been an essential source of income for many who have lost contract work as a result of the pandemic.

As we experience a third national lockdown, the furlough scheme has now been extended until the 30th April. So, if you find yourself out of contract work or have projects on hold, Umbrella Supermarket are here to explain what the Job Retention Scheme is, how it works and what this means for contractors.