Getting Paid - The Options

There are plenty of benefits when it comes to contracting, including the ability to set your day rate. However, it can be slightly more difficult when it comes to receiving payment.

As a permanent employee, you will typically receive payment straight into your nominated bank account, with your deductions taken care of. If you are a contractor, the situation is slightly different.

We have looked at how you could expect to receive payment as an employee of an umbrella company, and as a limited company director.

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Choosing the right structure

Contractors typically fall into one of two categories when choosing how to operate, either working as an employee of an umbrella company or forming your own limited company.

Both umbrella and limited pathways have very different payment structures.

The amount you’ll be bringing home at the end of each month is a big factor when contracting. Our take home pay calculator gives you an accurate picture of what you could expect to take home whilst working as a contractor.

Calculate your Pay

Umbrella company

Umbrella companies tend to be the preferred option for a contractor who is just starting their journey. This is because they will take care of your Income Tax and National Insurance responsibilities, leaving you to focus on your career. There are a few steps which will ensure you receive payment as smoothly as possible.

The umbrella company will sign a contract with your recruitment agency. You will sign a contract of employment with the umbrella company, making you an employee. When you begin work on a contract, you must submit timesheets detailing the hours you have worked, plus your expenses in that time frame. Your umbrella company will invoice the client for the work you have completed, eventually transferring this payment to you.

Before this payment reaches your preferred bank account, Income Tax deductions and National Insurance Contributions are made. A small amount is retained by the umbrella company, often referred to as their margin.

The final amount, the amount you will receive in your bank account, is your net payment. This follows a similar process to that of a permanent employee, after their Income Tax and National Insurance has been deducted.

To find out more about the umbrella pathway, our sister company Parasol is here to help.

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Discuss your options

If you have any question about contracting or would like any further advice, get in touch.

Limited company

Another option available to you, is to form a limited company. You will own this company, and it will have its own business bank account. Your clients will pay invoices into this bank account.

The amount of tax you must pay will vary, depending on how you structure your income.


For some contracts, you will be paid by invoicing the client directly. You will raise an invoice as your limited company for the required time period plus any expenses incurred whilst working.


Once the invoice is in your business bank account, there are deductions you must consider. You can invest up to £40,000 tax free per year into your pension pot; it’s worth putting this money away to secure a comfortable future. You must also take care of your company’s Corporation Tax, which is a deduction of 19% on any profits made.

Paying yourself a salary

When you’re a limited company director, there is no HR or payroll department to process your pay. As a result, you will need to pay yourself a salary, and you have the freedom to determine how much you take. The more you draw as a salary, the higher your tax liabilities will be.


After you have drawn your salary, you can also take out dividends to form part of your income. You must pay personal income tax on any dividends you have taken out; however, this is at a lower rate due to the Corporation Tax you have already paid on your profits. You can pay dividends at any point during the financial year.

To find out more about dividends and how they work, take a look at our guide to dividends.

Sole trader

The easiest way to start up a business in the UK, is as a sole trader. Many people choose to operate in this way, however it can become problematic for contractors.

As a contractor, it is highly unlikely that you will be working on a sole trader basis. One of the main reasons for this is the lack of financial protection; if money is owed by your business, any personal assets can be seized.

Paying yourself as a sole trader is simple; you transfer money from your business bank account into your personal bank account.


A partnership is where two or more self-employed people work in business together. Again, it's relatively simple to form a partnership.

One risk of working in a partnership is that if it owes money, the members of the partnership are liable.

If you are in a partnership, the profits of the company are shared as previously agreed.

Umbrella Company Hub

Sole Trader Packages


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