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Everything you need to kickstart your freelance career

Everything you need to kickstart your freelance career.

By: Aquent

LAST UPDATED: April 4, 2024

Key Takeaways

  • There are key differences between PAYE, Umbrella, and Limited Company contracting.
  • A PAYE freelancer is somebody engaged by the end-client either directly or through an employment business on a contractual basis and entitled to statutory benefits. Equal treatment in relation to equivalent permanent staff is governed by the Agency Worker Regulations (AWR).
  • A Limited Company contractor operates their own company which provides services to the end-client and is responsible for ensuring they comply with UK company and tax law.
  • Umbrella companies act as freelancers' employers, handling financial administration on their behalf and often offering some additional benefits, for a fee.
  • Freelancing can offer a variety of work across a variety of industries whilst often allowing individuals to develop a broad set of entrepreneurial, creative and problem-solving skills.

In the world of freelancing, getting job offers can be a mixed bag of excitement and uncertainty. You've probably done your research and thought quite a lot about your pay rate. But what about all the other aspects of a freelance job opportunity? 

Your potential new role is about more than just the work you will be doing or the pay you will be receiving in return—it's also about the terms of the engagement, the employee benefits (or lack of benefits) available to you, and how the role will contribute to your overall career. 

Every year, we help thousands of talent evaluate offers and find jobs they love. In this blog post, we break down the things you should consider and the questions you can ask to determine if this career choice makes sense for you.

What is the freelance work arrangement?

Understanding the work arrangement is a crucial step when considering any freelance opportunity. The term “freelance” can refer to a variety of non-permanent work situations, which is why it's vital to get clarity on the specifics of the role. A key question is whether you'll be working as PAYE (Pay As You Earn), via an Umbrella company, or as a Limited Company contractor.

Each option has varying benefits and restrictions, with different regulations impacting how you might pay tax, accrue holiday, or get paid. Below we've highlighted what the difference is between working as a PAYE, Umbrella or Limited Company freelancer.

What is a PAYE freelancer?

PAYE (Pay As You Earn) freelancers are individuals who work for clients or companies on a contractual basis but are engaged directly by those entities or through an employment business. This arrangement involves the end-hirer or employment business deducting income tax and National Insurance contributions (and any other required statutory deductions such as pension or student loans) from their earnings, before paying their net income. PAYE freelancers typically have less autonomy and control over their working arrangements compared to other freelance structures. They may have set hours of work, specific tasks assigned by the end-hirer, and limited flexibility in how they carry out their duties. Despite this, they benefit from the simplicity of their tax obligations. Because their taxes are deducted automatically by the end-hirer where they only engage PAYE, freelancers don't have to worry about managing their tax payments or filing self-assessment tax returns.

One of the advantages of being a PAYE freelancer is access to statutory employment rights and benefits similar to those enjoyed by full-time employees. This includes entitlements such as sick pay, holiday pay, and pension contributions, depending on the terms of their contract. Additionally, PAYE freelancers may be covered by employment laws protecting against unfair dismissal and discrimination, providing them with some level of job security. Another benefit is the straightforward nature of their employment status, which can make it easier to secure contracts with companies that prefer to engage workers through traditional employment arrangements rather than through freelancing platforms or limited companies.

However, PAYE freelancers can also face some potential limitations. Their earnings may be subject to higher rates of taxation compared to other freelance structures, potentially reducing their take-home pay. They may also have less flexibility in managing their business expenses and might not be able to claim as many tax deductions in comparison to limited company contractors. Additionally, PAYE freelancers can sometimes find it more challenging to negotiate higher rates or secure contracts with certain clients who prefer the cost-saving benefits of hiring self-employed workers.

Despite these hurdles, the PAYE arrangement can be very advantageous for freelancers who prioritise simplicity, stability, and access to employment benefits over maximum financial flexibility and tax efficiency.

What is a Limited Company contractor?

Limited Contractor contractors operate via their own limited companies, through which they provide services to clients or companies on a contractual basis. This arrangement involves the freelancer setting up a limited company, often referred to as a personal service company (PSC), which becomes their employer entity. As a Limited Contractor, the freelancer invoices clients for their services and is responsible for managing their own finances, including paying taxes and National Insurance contributions (where their assignment is outside of IR35). Limited Contractors have greater autonomy and control over their working arrangements compared to PAYE freelancers. They can negotiate their rates, choose their clients, and have more flexibility in how they structure their work.

One of the primary benefits of being a Limited Contractor is the potential for tax efficiency. Limited Contractors can take advantage of various tax planning strategies, such as claiming business expenses and utilising tax allowances, to minimise their tax liability. By structuring their earnings through their limited company, they might pay less tax compared to PAYE freelancers, resulting in higher take-home pay. Additionally, Limited Contractors have the opportunity to build a business asset in the form of their limited company, which can potentially increase in value over time and provide long-term financial benefits.

However, Limited Contractors also face certain challenges and responsibilities. There's extra admin associated with running a limited company, such as managing accounts, filing annual financial statements, and ensuring compliance with UK company law and tax regulations. Limited Contractors can also often be responsible for securing their own contracts and managing client relationships, which can require strong business acumen and networking skills. They may not have access to the same employment benefits and protections as PAYE freelancers, such as sick pay and holiday pay, unless they choose to implement these provisions within their contracts or through other arrangements. It's also worth noting IR35 legislation, which, in short, impacts whether a Limited Company contractor will receive net or gross pay per assignment – more on this here.

Despite these challenges, the Limited Contractor arrangement can offer individuals greater control, flexibility, and potential financial rewards compared to traditional employment or PAYE freelancing. It is well-suited for individuals who are willing to take on the additional responsibilities of running a business and who value the opportunity to maximise their earnings through tax-efficient structures and business ownership.

How do Umbrella companies work?

Contractors who choose to work through an Umbrella company in the UK essentially become employees of that Umbrella company for the duration of their assignments. Under this arrangement, the freelancer enters into an employment contract with the Umbrella company, which then acts as their employer. Typically they submit timesheets for their work to the Umbrella company, which in turn invoices the client or employment business on their behalf. The Umbrella company is responsible for deducting income tax, National Insurance contributions and any other required statutory deductions. The Umbrella will reduce the gross umbrella pay rate by any relevant fees (including but not limited to employer's national insurance contributions, apprenticeship levy, employer's pension contribution, holiday and the umbrella company margin) before paying them their net income.

One of the primary benefits of working through an Umbrella company is the reduced admin. Unlike Limited Contractors who are responsible for managing their own limited companies, Umbrella company freelancers don't have to deal with the complexities of setting up and running a business entity. The Umbrella company takes care of tax calculations, payroll processing, and other administrative tasks on behalf of the freelancer, providing them with greater convenience and peace of mind. Additionally, Umbrella company freelancers may have access to certain employment benefits and protections, such as statutory sick pay, holiday pay, and pension contributions, similar to traditional employees.

However, working through an Umbrella company may also have some drawbacks and considerations. Freelancers may have less control over their finances compared to Limited Contractors, as they do not have the same level of autonomy in managing their earnings and expenses. Additionally, Umbrella company freelancers may incur higher fees for the services provided by the Umbrella company, which can reduce their overall take-home pay compared to other freelance structures. Additionally, while Umbrella company freelancers may benefit from certain employment rights and protections, they may not have access to the same tax advantages and deductions available to Limited Contractors.

Overall, the decision to work through an Umbrella company as a contractor in the UK depends on individual preferences, priorities, and circumstances. This arrangement may be suitable for those who value simplicity, convenience, and access to certain employment benefits, and who are willing to accept potentially lower take-home pay in exchange for reduced administrative responsibilities and greater peace of mind. However, freelancers should carefully consider the fees and terms associated with Umbrella company services and compare them to other freelance structures before making a decision.

What benefits do I get as a freelancer?

Whether you've just skipped to this bit to see if you still get holiday allowance, or you're dazed after reading your way through the differences between PAYE, Limited Company contractor and Umbrella companies, here's the breakdown on what benefits you get as a freelancer.

PAYE Benefits: PAYE freelancers in the UK can expect to receive employment rights and benefits, including access to statutory entitlements such as sick pay and holiday pay. Statutory Sick Pay (SSP) ensures that PAYE freelancers receive financial support if they are unable to work due to illness or injury, providing them with peace of mind and financial stability during periods of ill health. SSP is payable for up to 28 weeks and is paid by the employer (or the employment business acting as the employer) to eligible employees. Additionally, PAYE freelancers are entitled to statutory holiday pay, which guarantees compensation for taking time off for annual leave. The statutory entitlement for holiday pay is currently 5.6 weeks per year, including the UK's eight bank holidays, and is calculated based on the freelancer's average weekly earnings. Maternity/Paternity leave are also included in line with statutory benefits, as well as Adoption Leave, Dependent Care Leave, and pension auto-enrolment. These statutory entitlements help to ensure that PAYE freelancers are provided with fair treatment and protection in the workplace, enhancing their overall job security and well-being. Where the Agency Worker Regulations [AWR] apply, certain statutory benefits (such as holiday entitlement) are enhanced to ensure equal treatment with permanent comparator staff at the end client/hirer.

Umbrella Benefits: Similarly to PAYE freelancers, those working through an Umbrella company have an employment contract and so are entitled to statutory benefits like holiday, sick pay and pension enrolment. The primary difference is that those Umbrella freelancers aren't entitled to all of the same company perks that a PAYE freelancer might be, because their employer is the Umbrella company rather than the end-client. However, most Umbrella companies offer an assortment of benefits including private healthcare, gym memberships and perk boxes which you would be eligible to receive.

Limited Company Benefits: As a Limited Company contractor or freelancer, you're considered a self-employed individual and so aren't entitled to receive holiday pay, sick pay, or maternity/paternity leave in the same way a PAYE or Umbrella freelancer would. As a Limited Company you may have the option to arrange your own holiday pay, sick pay, and maternity leave through private insurance schemes, and similarly you may be able to come to an arrangement in your contract with a client that accommodates pre-booked holiday or unforeseen time off.

How does working as a freelancer impact career progression?

Working as a freelancer, whether through PAYE, an Umbrella company, or a Limited Company, offers several benefits for career progression. Freelancers gain diverse experience by working on a variety of projects for different clients across various industries. This exposure allows them to develop a broad skill set, enhance problem-solving abilities, and adapt to different work environments. Additionally, they have the opportunity to network with a wide range of professionals, including clients, colleagues, and industry contacts. Building a strong network can open doors to new opportunities, collaborations, and referrals, which are instrumental for career advancement.

Freelancing broadly provides autonomy and independence, allowing them to set their own schedules, choose their clients, and define the scope of their work. This freedom empowers freelancers to pursue projects that align with their interests, strengths, and career goals. By taking control of their career paths, freelancers can focus on projects that contribute to their professional development and personal fulfilment. Moreover, freelancing encourages continuous learning and skill development as they adapt to new projects and client requirements. Staying updated on industry trends, technologies, and best practices enhances expertise and marketability, positioning freelancers for career growth and advancement opportunities.

Furthermore, freelancing fosters an entrepreneurial mindset characterised by creativity, innovation, and resourcefulness. They've got to be proactive in marketing their services, managing finances, and finding solutions to challenges that arise in their work. This entrepreneurial mindset translates into valuable skills for career progression, such as leadership, strategic thinking, and resilience. Overall, working as a freelancer can offer numerous opportunities for career advancement, enabling individuals to chart their own paths to success and achieve their professional goals.

If you're interested in freelance or contract opportunities, you can find new roles every week on our job board here.