Confused about Contractor Payroll?

If you work as an independent contractor it’s important that you take the time to understand how the payroll arrangement between you and the company you are working for can operate.  Fortunately, there are a few different options for you to explore in ensuring that your pay is dealt with efficiently. 

Using an umbrella company

An umbrella company essentially means that the contractor becomes an employee of said company, and is responsible for submitting timesheets to them.  The umbrella company then invoices the client for the work carried out by a contractor.  The umbrella company then pays the contractor as a PAYE employee, subtracting their fee at the same time.

There are a lot of plus points regarding using umbrella companies.  First of all, they’re very easy to deal with, which is ideal if you prefer to cut out as much administration as possible from your workload.  Essentially, they minimise the paperwork hassle for you and deal with the issues such as NI and tax, meaning that all you have to do is concentrate on finding the work and generating income. This is ideal if you’d prefer to avoid having to deal with your own tax return.  Using an umbrella company also ensures that there will be genuinely verifiable paperwork for HMRC if required.  An umbrella company will also deal with invoicing if required to ensure that a contractor is paid in full and on time.

Standard self-employment

Those who carry out contractor work are often paid in the same way as standard freelance workers. When the work has been completed they simply send an invoice across to the firm they’ve carried out the work for and await payment.  If that course of action is pursued, as a sole trader then all the attendant paperwork will follow; self-assessment tax returns will have to be submitted and National Insurance payments will have to be made.  The amount of paperwork required is time consuming to deal with and the time could be more profitably used.  This is where an umbrella company is really useful in removing that burden.


This option is by the far the most common, and is without doubt the safest way of ensuring you’re complying with HMRC regulations.  All of the main companies who pay wages will use PAYE, especially if they operate within the retail or the commercial sector.  The PAYE method means that your employer is responsible for deducting tax, pension, NI contributions and the like from your wages before they are sent out, and is also responsible for paying your standard income tax through the year.  If you are a long-term contractor constantly on the books of one firm then this is the only legal way to proceed. It’s worth noting, of course, that a PAYE contract should also include sick pay and maternity pay, so your pay won’t suffer if you have a prolonged period of illness as it would if you were paid per hour.

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