Direct PAYE / Limited Company / Self Employed / Umbrella PAYE
Below is an overview of 4 common payment models used by companies in the UK. Not all models may be available to you as it is dependent on the type of work you complete or your employer’s preferences.
Payment Model: Direct Employment (PAYE)
A conventional form of engagement that gives employees extra employment rights and responsibilities.
These rights include;
- Statutory Sick Pay,
- Statutory maternity, paternity, adoption and shared parental leave and pay.
- Minimum notice periods if their employment will be ending, eg if an employer is dismissing them
- Protection against unfair dismissal
- The right to request flexible working
- Time off for emergencies
- Statutory Redundancy Pay
Some of these rights require a minimum length of continuous employment before an employee qualifies for them. An employment contract will generally state how long this qualification period is.
A worker working under an employment contract will have their Tax & National Insurance deducted from each payment they receive. Assuming the worker doesn’t have other streams of income and has been paid on the correct tax code, they will not be required to complete a tax return at the end of the financial year.
Payment Model: Limited Company
Limited Companies are often used as the most tax efficient payment vehicle available to higher earners. A Limited Company Director will usually need to hire his or her own accountant to assist in the set up and administration of their own Limited Company.
Payment Model: Self Employed
For individuals on contracts from a day to several months who are genuinely in business on their own account and want maximum pay without the hassle of a limited company or even hiring an accountant. The main financial benefits are lower National Insurance contributions and the ability to offset expenses such as travel, food and clothing against your tax liability. Depending on your tax status you can receive either gross payments to you with no tax deductions, or payments net of tax as required under CIS for construction workers.
Payment Model: Umbrella PAYE
Working as an umbrella company employee is an alternative to being paid under direct PAYE by an employer or agency. It guarantees your statutory rights as an employee, and is fully compliant with HMRC requirements; You should find your take home pay is higher than direct PAYE as you can claim the legitimate expenses incurred in your everyday work such as travel and subsistence.