As a contractor there are various options available to you on how best to run your payroll.  There are various matters you need to take into consideration such as:

Tax Efficiency – Do they offer a tax advantage?

Administration - Will it be time consuming?

Legislation – Will you be at risk?

To help you decide MyPay have written a comprehensive guide on each so that you have all the facts so can make an informed decision.  The 3 options available to a contractor are:

Pay As You Earn (PAYE)

Limited Company

Umbrella Company

Pay As You Earn through your Agency

Although the demand for this service has significantly decreased over the years due to the popularity of the Umbrella Company market, some agencies will operate a PAYE system.  This is when the agency subtracts the tax and National Insurance contributions from the contractor’s gross pay and pays their wages into their bank account exactly the same as if you were in full time employment.  This is completely risk free as it pays on a PAYE basis so you do not have any worries of IR35 or MSC.

The downside of using this is that you cannot offset any of your expenses so cannot take advantage of the tax benefits available to contractors or freelance professionals.  Also as operating a PAYE ultimately leads to costs for the agency such as payroll staff and Employers National Insurance it is highly likely that if you choose this option there will be a deduction in your pay to compensate the agency for this.

Overall this solution is a safe option for all contractors and freelance professionals however it is not a tax efficient solution.

PAYE versus MyPay

These two services are very similar in a lot of ways, they both are virtually administration free and neither requires you to set up a Business Account nor employ an accountant. However there is one major difference between the two and that is when you use MyPay you are able to offset your expenses against your tax and NIC liabilities, whereas through the agency PAYE you pay the tax and NIC on your full earnings.

Also in some cases an agency may offer you an up-lift in your pay when you go with MyPay, this is classed as a Limited Company rate.  The reason it is called this is that they will be paying a limited company instead of an employee, in this instance it would be MyPay Limited that they would pay. 

Overall 95% of contractors would be better off using MyPay than PAYE. To check if you fall into this group you can complete an on-line calculation or speak to one of our highly trained business team on 0161 442 4842.

Moving from PAYE to MyPay

This is extremely easy to do and is probably something that your agency is expecting you do.  All you simply have to do is to fill in the on-line application or give one of our highly trained business team a call to register on 0161 442 4842.

We would than get in contact with your agency on your behalf (It is advisable to drop them an email to let them know, as they will want your permission before changing).  They will take a copy of our details to pay in and send us out a contract to sign.  This is all normally completed within 1 business day, so you can start earning the extra money almost instantly.

Limited Company Solution

This used to be the preferred option for the majority of contractors and was used as a way of minimising their tax and National Insurance liability.  This was achieved by the money being released from the company via both salary and dividends.  As a general rule the contractor would pay themselves a salary of around £10,000 and then release the remaining capital as a dividend.  It is mainly down to this way of operating that the HMRC brought out IR35 as they felt that a lot of contractors and freelance professionals were not paying the correct level of tax and NIC’s.  It is now only recommended that you operate in this manner if you are 100% certain that your contract is outside of IR35.

The other downside of using a limited company is that you have a very high level of responsibility to ensure that everything is completed correctly, on time and if the HMRC decide to investigate that you have all the financial details available for the last 7 years.

There are companies who will offer to take a lot of this administration burden away and class themselves as an ‘Accounting Service’ for your company.  If you operate your own limited company and use such service providers then you could be at risk if they are found to be an MSC the legislation will apply to you.  This could ultimately lead to you facing a large back-dated tax bill together with penalties and interest.

Limited Company versus MyPay

MyPay offers numerous benefits for contractors and freelance professionals over that of a limited company. 

More free time as all your administration is taken off you

Peace of mind knowing you have no risk of IR35 or MSC legislation

Flexibility of coming in and out of contracts without having to do year end accounts

Lower fees

No tax bills at the end of the year

No need to set up a business account

And many more

It is only if you are 100% certain your contract is outside of IR35 and you do not use any provider that could possible be classed as a MSC and you are in a long term contract and that you are adept at completing paperwork accurately and on time that a limited company would be beneficial.  If however you have any doubts over your long term future or IR35 status or do not feel comfortable with the large amounts of paperwork and responsibility then MyPay would be a preferential option. 

Moving from Limited Company to MyPay

This is very easy to do. Simply contact our new business team on 0161 442 4842 or email mypay at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it and they will explain the service in more detail.  If however you already have all the information you need simply complete the on-line registration.  All you will then need to do is obtain your P45 from your company and send it to MyPay. 

We would then get in contact with your agency on your behalf (It is advisable to drop them an email to let them know, as they will want your permission before changing).  They will take a copy of our details to pay in and send us out a contract to sign.  This is all normally completed within 1 business day, so you can start earning the extra money almost instantly.

As you have a company you will still need an accountant to complete the end of year accounts, once this has been completed you can close the company.

As you have a company you will still need an accountant to complete the end of year accounts, once this has been completed you can close the company.

What is an Umbrella Company?

Umbrella companies were first set up in April 2000 when the legislation IR35 was introduced and immediately became a popular option for contractors and freelance professionals.  The reason for this was due to the tax efficient take home pay they achieved whilst paying PAYE tax and NIC. This gave the contractor peace of mind of knowing  they were 100% compliant with IR35 .

The Umbrella Company also proved popular with contractors whose contract was outside of IR35 but were on short term contracts and wanted a quick and easy set up. They are also popular with any contractor who simply does not want the worry, administration burden or costs associated with running their own limited company.

Word of warning – some companies may market themselves as Umbrella Companies but are in fact Composite companies. If they pay in any form of dividend payment they do not represent the 100% guaranteed compliance that a PAYE Umbrella Company does.

Umbrella versus Umbrella

As many contractors will tell you not all Umbrella Companies are equal, in fact the difference can be huge.  For this reason it is important to ensure that the company you use is right for you.  When choosing an Umbrella Company it is important to ensure the following:

• They are compliant with all HMRC legislation
• They operate a same day invoicing service
• They operate a daily payroll service
• They have full insurance cover – note some may charge extra for this
• They give you a single point of contact
• They provide a pro-active service
• They can give you advice to ensure you are gaining the utmost from your  umbrella company
• They can organise a set up within 24 hours

MyPay provide all of these services to all of our members, all of which are included at no extra cost. 

Moving from Umbrella to MyPay

If you feel that the service you are currently receiving from your Umbrella Company is not up to the standard that MyPay offer then why not move?

This is extremely easy and can be done at any point within your contract, not just at an extension or new contract.  All you simply have to do is to fill in the on-line application or give one of our highly trained new business team a call to register.

We would then get in contact with your agency on your behalf (It is advisable to drop them an email to let them know, as they will need your permission before changing).  All that is left then is to request your P45 from your umbrella company, which they are legally required to send you, and in the meantime fill in a P46.  This is all normally completed within 1 business day so you can get the benefit starting that very same week. So why wait?