For UK contractors, understanding how you get paid is about more than just the money. It can affect how much you take home, the rights and benefits you receive, and the amount of paperwork you need to manage. Whether you are new to contracting, switching between jobs, or running your own limited company, knowing the difference between PAYE, Umbrella, CIS, and Limited Company (Ltd) is essential to making smarter decisions, protecting your income, and avoiding unexpected tax or benefit issues.
Here is a simple guide to explain these payment methods and what they mean for you as a contractor:
PAYE (Pay As You Earn)
- You are officially an employee, either for a company or a recruitment agency.
- Taxes and National Insurance (NI) contributions are automatically taken from your pay by the employer.
- You receive holiday pay, sick pay, and other employee rights.
- There is very little paperwork for you to manage.
- This option is suitable for steady, long-term roles but is also common in temporary or agency jobs.
Umbrella Company
- You are classified as an employee, but your employer is the umbrella company instead of the client or agency.
- The umbrella company processes your pay, deducts tax and NI, and pays you after taking a small fee.
- You receive employee benefits such as holiday pay and sick pay, with minimal admin… often you only need to submit a timesheet.
- This option is ideal if you work on multiple short-term contracts and want less paperwork.
CIS (Construction Industry Scheme)
- You are considered self-employed when working in a role that falls within the CIS scheme (check eligibility here).
- Your contractor deducts 20% tax from your pay and sends it straight to HMRC.
- You do not receive holiday or sick pay but can claim more expenses.
- You are responsible for completing your own tax return and keeping your records in order.
- CIS workers generally get paid more than PAYE or umbrella workers because they cover their own expenses like insurance, equipment, and other costs.
- CIS works well for tradespeople and contractors in construction who prefer control over their pay and expenses.
Ltd Company
- You operate your own Ltd company and are effectively both employer and employee.
- You have greater control over your tax planning, salary, and dividends.
- You must handle your own accounts, payroll, and tax submissions or hire an accountant.
- This option can bring tax efficiency but also more administrative work and responsibility.
- Best suited for contractors with longer-term contracts or those seeking greater financial control.
Quick Comparison Table
| Feature | PAYE | Umbrella | CIS | Ltd |
|---|---|---|---|---|
| Your status | Employee | Employee (umbrella) | Self-employed | Company director/employee |
| Who handles tax/NI? | Employer | Umbrella company | Contractor | You or your accountant |
| Holiday and sick pay | Yes | Yes | No | No (unless you arrange) |
| Can you claim expenses? | Very limited | Very limited | Yes (more options) | Yes, through the company |
| Typical pay level | Standard | Standard minus fees | Usually higher to cover costs | Potentially highest, with tax planning |
| Best suited for | Steady or temp jobs | Short contracts and flexibility | Construction and trades | Established contractors wanting control |
Choosing the right payment method can have a big impact on your contracting career. PAYE offers security and simplicity; Umbrella companies provide flexibility and employee benefits without the hassle; CIS allows greater expense claims and independence but without employee protections; and operating through a Ltd company can bring tax advantages but requires more admin and responsibility.
If you are unsure which option fits your situation, speak to us to help make the best choice and avoid costly mistakes:
📞 01925 906 640