PAYE vs Limited Company

I tried reading anything related to the topic around here, and of course I already googled for the information.   I had no clue what the difference was, now I guess I know the basics.

US-person specifically, is there any additional/specific highlights we should be aware of?

Also, have any of you been working temp/contract and have been faced with this option / decision?  PAYE is the simplest route, Ltd company 'may' save you tax money but it comes with additional hassle/paperwork and not-so-minimal costs...

-->  Which one did you choose and why?   <---


I was not looking at it from the being self-employed view...  just working for a bigger company on a temp/contract basis...

I guess another topic will be the differences between being a contract vs a permanent worker, and how to make sure the temp/contract work is up to par and covering any important factors, etc...
thanks

I was doing supply teaching through an agency last year and had the option of PAYE or getting paid through an umbrella company.  After contacting the umbrella company I went with that because even though I had to pay them to pay me, I made more than I would have through PAYE because I got to claim tax-free expenses.  (That means that they take the amount of money you earned and subtract your expenses before calculating tax.)  Because I wasn't a permanent employee I could claim travel expenses to and from work and even meals.  Also, the biggest savings was that since I was not a "UK national" I also got to claim my rent and bills!  I worked for 4 months and didn't have to pay ANY tax.  The other thing to consider though is that (at least with my company) you have to pay your employers end of NI contributions too.

The bad part of umbrella companies is that there is one more channel through which your pay can get messed up.  DH is getting paid through an umbrella company right now and I think his pay gets messed up at least once a month and he doesn't get as much tax savings as I did (he's British so doesn't get to claim rent and things).  So I guess it really depends on your situation.

wow, interesting.
I don't know if you know, but it reminds me, for example in the US, people with a work visa (H1 I think?), not USC or GreenCard, even when working permanent, they can claim some business expenses etc similar to what you described, as with rent and stuff, much more limited I suppose, but I had a co-worker who had told me about it....
I dont know how we now fit here with a work visa (tier 1), but I was almost pretty sure that you could not do the same expense-claiming when a permanent job.
But now I see that whether you're from the UK or not, when working as self-employed (/limited company?) that you can claim some of these expenses...

But is it all clear-cut lawful or do accountants have to go through loop holes or loose ways of interpreting things etc.   If I am doing a temp/contract job, which would otherwise be a permanent role if the company wanted to hire permanently, can you still claim travel expenses to and from work and meals, and perhaps even rent and bills?   (what cant you claim then?).   It sounds awfully good, too good, no?

I know comparing contract work to permanent work, you have other advantages/disadvantages (insurance(s), bonus, security, etc?), ..... , but just between PAYE and Ltd company... basically, you would talk to your/the accountant and if the costs are outweighed by the benefits, then you would opt for ltd company?
Any other set clear advantages for PAYE?

Thank you very much...
I'd still like/hope to get a permanent job rather than contract.. but this is all good to know and may become very useful soon.  THANK YOU.

I imagine there are some loose interpretations of the law that allowed me to claim rent and bills.  Now that I'm here on a spouse visa I'm not sure I could claim those same things.  Before I was here on BUNAC so that might have made a difference.  As for claiming travel expenses, at least with the umbrella company I was with, you could claim travel expenses until you knew you would be permanently working in the same place.  I was a supply teacher and wound up only working at one school, but since there was the possibility of working elsewhere I still got to claim travel expenses until I knew it would be my last post.  So for the last month I couldn't claim travel but still got to claim expenses for other things because I wasn't a UK national. 

My husband also gets to claim his travel and meals even though his job is only in one place.  He works in a situation similar to what you're describing - he would have the same role and same work place as a permanent employee, but right now he is on a 6 month contract through an agency, so he gets to claim expenses.  He's at work now, but I forwarded him this thread, so hopefully he can chime in and tell you more about his experience, since it sounds a bit more similar to yours than mine is. 

When you talk to the umbrella company they will tell you what you can claim expenses for, then you just send them receipts.  I went with the theory that they would get in trouble if I wasn't supposed to be able to claim these things so they wouldn't be telling me to do anything illegal.  But I might be too trusting!

As far as I can see, there are a couple advantages to PAYE.  1) You are getting paid directly by your employer so there is less chance of your pay getting messed up.  2) You don't have to pay them to pay you.  My husband has had times when he has gotten paid less than he would have with PAYE because of having to pay the umbrella company.  It worked out well for me, less so for him.

..
I dont know how we now fit here with a work visa (tier 1), but I was almost pretty sure that you could not do the same expense-claiming when a permanent job.
But now I see that whether you're from the UK or not, when working as self-employed (/limited company?) that you can claim some of these expenses...

But is it all clear-cut lawful or do accountants have to go through loop holes or loose ways of interpreting things etc.   If I am doing a temp/contract job, which would otherwise be a permanent role if the company wanted to hire permanently, can you still claim travel expenses to and from work and meals, and perhaps even rent and bills?   (what cant you claim then?).   It sounds awfully good, too good, no?

The expenses scheme for contractors and temporary workers is fully sanctioned by the goverment.  The way it works is that you are a one-man limited company and can thus claim tax relief on your expenses.  An Umbrella company basically takes care of all the paperwork and legal compliance for you (so you don't need an accountant), in return for a small cut of your salary (usually about 4%.) You can get tax relief on this fee.   Also, contractors working through this scheme have to pay Employer's NI, but again tax relief can be claimed on that.

The way it works is that you take your Gross income and deduct all the above deductions, and your expenses.  You only have to pay income tax and employer's NI on what's left after this.  Then you add your expenses back on to get your final payment.   So if you earned £400 and had £300 in expenses then you would only have to pay tax on £100.

Here's my Umbrella company MyKeyPay's guide to what expenses can be claimed - it varies from one umbrella to the next:

http://www.mykeypay.com/media/uploads/AllowableExpensesGuidelinespPORTA08JAN09.pdf

I know comparing contract work to permanent work, you have other advantages/disadvantages (insurance(s), bonus, security, etc?), ..... , but just between PAYE and Ltd company... basically, you would talk to your/the accountant and if the costs are outweighed by the benefits, then you would opt for ltd company?
Any other set clear advantages for PAYE?

If you're being paid by the day then there are few advantages to being paid by PAYE unless you accrue almost no expenses in the course of your duties.  Otherwise your take home pay will be higher with an umbrella company.   The only other advantage from PAYE is that the deductions from your salary will go to "useful" taxes such as Employee's NI and Student Loan repayments, which have some tangible benefit to you.   Under the umbrella scheme you will pay less of the "useful" taxes since you will be paying Employer's NI and the Umbrella procesing fee.

Here's an example.  Last week I earned £525 gross and had expenses of £140.50.   Here's what my payslip looked like from the Umbrella company:

  Gross Pay       525.00
  Expenses     - 140.50
  Umbrella Fee   -25.00
  Employer's NI  -28.32
  Taxable Salary 331.18

  Income Tax     -41.33
  Employee's NI  -24.31
  Student Loan    -3.00
  Expenses        140.50

  TOTAL           403.04

And here's what it would be if I had been paid through PAYE:

  Gross Pay       525.00
  Income Tax     -80.10
  Employee's NI  -45.66
  Student Loan   -21.00

  TOTAL            378.24

So I took home an extra £25 through the umbrella company.  Much bigger savings are possible, of course.

I am contemplating similar issues as you are in understanding the differences between PAYE/ LTD  or whether or not to use an umbrella company or an independent accountant.    I think it depends on your situation, and also whether your contracts will be IR-35 compliant or not.   There are pro's and con's to any of the options.  A really good website is

www.contractorcalculator.co.uk [nofollow]

They provide loads of advice and information and provide calculators where you can see the difference between PAYE/LTD and what your rate of pay would be under each.