At UpperLimit we understand that as a new contractor it can all be a bit daunting. There is so much conflicting advice that it is difficult to know where to begin. With our first-hand experience of the contracting market we can make the transition to your new role as smooth as possible so you can concentrate on settling in.


When you are working through an Umbrella Company or your own Ltd Company the agency will pay you a limited company (Ltd) Rate rather than a PAYE rate.

What is the difference?

Ltd rate is made up of the PAYE rate, plus an amount equivalent to your entitlement under the Working Time Directive to holiday pay, plus Employers NI.

If an agency were paying you directly, therefore acting as your employer, they would pay you a PAYE rate and they would pay the Employers NI and holiday pay like any other employer. As they are not paying you directly the rate they are offering you includes your holiday pay and the Employers NI, a Ltd Rate, in other words all of the costs they would have incurred in paying you themselves but without the hassle of processing your pay and dealing with HMRC.

If you opt to go through an Umbrella Company instead of your own Ltd company the Umbrella Company will process your pay and deal with HMRC on your behalf. Your rate of pay (which includes holiday pay and Employers NI) will be processed and the Employers NI deducted and paid to HMRC and the holiday pay deducted and held in a savings account to be paid to you when you take your holiday.

Some contractors ask us why they should pay this when they are an Employee of UpperLimit under an over-arching contract, this is because the rate of pay the agency are paying includes the Employers NI and holiday so is not a true reflection of your actual rate of pay.

It is worth double checking with your agency that the rate they are proposing to pay you includes Employers NI and an amount to cover your holidays, as, if they are going to pay you the same rate when you work via an Umbrella Company as they would if you went PAYE through them, then you will be out of pocket.

As a contractor you only invoice the agency or end client for the hours you actually work. This means that when you take a holiday no timesheet is submitted for those days, and no payment is made. However, when the agency gives you a Ltd Rate it includes your statutory holiday pay.

UpperLimit will deduct your holiday pay from the rate of pay you receive and hold it in a secure savings account on your behalf. When you take your statutory holiday you will be paid for your holiday entitlement.

Payday is either every Friday or monthly on the 5th of each month.

The Ltd Rate is the rate that you would have if you were a permanent employee plus an amount to cover your entitlement to holidays under the Working Time Directive, plus an amount to cover the Employers NI.

PAYE Rate + Holidays + Employers NI = Ltd Rate

Some agencies quote you both the PAYE Rate and the Ltd Rate when asking you if you wish to be paid directly through them or via an Umbrella Company. Although everyone assumes that as the Ltd Rate is higher, they will come out with more this is actually not true. If the agency are operating the Ltd Rate correctly, and are passing those 2 costs that they would have had on to you on top of the PAYE rate, then you would take home the same over the course of a year less the Umbrella Companies margin. (This is because the Employer’s NI will be taken from the payment to pay to HMRC and holiday pay will be deducted and held in a savings account).

The financial benefit of using an Umbrella Company is not in getting a Ltd Rate but in offsetting your expenses. If you don’t have expenses to offset then there are other benefits to using an Umbrella Company.

No, unfortunately not everyone is better off via an Umbrella Company, so it is important that you deal with an honest company that will advise you if you will benefit from their service, like UpperLimit.

If you have less than approx. £40 of expenses per week, then you won’t offset enough in tax and NI to recover our margin. This calculation is proportionate to the amount of the Umbrella Company’s margin, so the higher their margin the more you need to have in expenses to offset before you start to see the financial benefit.

You may have other reasons for using an Umbrella Company besides being able to offset expenses, such as not wanting the hassle of running your own Ltd Company. The other benefits of using an Umbrella Company are explained here.

You can offset expenses if they are wholly, necessarily and exclusively incurred in the performance of your contract and are within the guidelines that HMRC set. Our Expenses Policy details the main items that can be offset.

You can offset expenses so long as the place of work is a temporary one, this means that you will be there for less than 2 years. At the point where you either have, or know that you will be there, for more than 2 years you are no longer able to offset them.

There is a limit to the value of expenses we are able to process in any period for you, as HMRC dictate that we must pay you at least National Minimum Wage. This means that we will process as much as we can up to that point and if there are any expenses left over, we will carry them forward automatically to the next payment.

In the same way that your expenses can be offset, the margin that you pay us is a legitimate expense. Therefore, this will be offset against tax and NI too.

If your Umbrella Company is a PAYE Umbrella company, like UpperLimit, then you will be an employee of the Umbrella Company under an Over-Arching Contract of Employment. This means that your income will have been taxed throughout the year, as income from employment, according to the tax code we have for you.

If you have no other sources of income then there would be no need to complete a self-assessment, although if you have income from a pension, savings, property, shares etc, or you have another job in the tax year, or you are a Director of a company, then we would recommend that you get advice from HMRC as to whether they expect you to complete a Self-Assessment.

If you leave part way through the year, we will issue you with a P45, or if you are still using UpperLimit at the end of the tax year, you will receive a P60 showing your income, tax and NI for the year.

IR35 is a very contentious issue at the moment, and new guidance issued in April 2012 is tightening up the test to determine whether your employment status is employed or self-employed. The good thing about using a PAYE Umbrella Company is that you are saying that you are an employee of the Umbrella Company, paying tax and NI at an employed person’s rate, and therefore IR35 is not an issue to you.