As a contractor, once of the decisions you need to make is whether you wish to operate under an umbrella company or as a limited company. This is one of the questions that we are asked many times and in this short article we highlight some of the differences between using an umbrella company and a limited company.
An umbrella company acts as an employer to a contractor who may be working on a fixed term contract. The umbrella company will generally process the contractor timesheets and issue an invoice to the client – the company the contractor is working for. The umbrella company will then pay you the contractor through PAYE.
As a contractor, one of the quickest ways to start getting paid is via the use of an umbrella company.
Here are some of the benefits of running through an umbrella company:
• Its quick and you do not need to go through the admin hassle of setting up a limited company.
• The umbrella company will provide you with a contract of employment and handle all Income Tax and National Insurance contributions leaving you, the contractor to focus on your work.
• You may claim legitimate business expenses during the term of your contract.
• Any eligible expenses such as travel and subsistence may reduce the amount of your taxable pay, meaning more in your pocket.
• You will receive holiday pay via an umbrella company.
• You will receive employment rights!
Hence, using an umbrella company is the closest thing to working as an employee!
The obvious alternative to using an umbrella company is to set yourself up as a limited company. Operating under a limited company can mean that you will receive more income than if you were working under an umbrella company. However, you will also have a lot more responsibility.
Here are some of the benefits of running through a limited company:
• You will have limited liability – if you lose your business, you will have legal and financial protection.
• Your marketing reach could extend to potentially larger clients that will only work with limited companies.
• You can borrow capital on your business which will help with expansion.
• You can put in place an exit strategy to sell the business in the future if relevant to your needs.
Operating through a limited company will allow you to claim back a lot of expenses e.g. IT equipment to help run your business, travel costs, accountancy fees and a lot more.
Although operating through a limited company will increase your take home pay it also
Involves more work than going through an umbrella company, for example:
• Ensuring companies house is informed of any significant changes to the company.
• Ensuring timely completion of accounts and tax returns to avoid penalty.
• Accurate record keeping.
• Invoicing clients direct.
• Ensuring any tax is paid on time to avoid penalty.
• VAT returns if registered for VAT.
• Responding to any communication from HMRC and Companies House.
• Completing your annual self assessment tax return.
• Ensuring IR35 compliance.
It’s important to stay on top of things otherwise you could be landed with a nasty unexpected bill from HMRC or Companies House.
A limited company allows you to have more control of your business as you are now responsible for your own tax affairs. You can also register for VAT on the flat rate VAT scheme helping you retain some of the VAT you receive, again meaning more money in your pocket!
Further, if you do wish to grow your business in the future by for example taking on an admin assistant, this can easily be administered through your limited company.
It’s clear to see that operating through a limited company requires a little more paperwork and admin than if you were to go through the umbrella route. Before you jump into any decision there’s a lot more that needs to be considered. We’ve only just covered the tip of the iceberg in this short discussion and the best thing for you is to seek some advice before making a decision.
If you would like to keep more of your earnings but are not too keen on the additional admin duties, please do get in touch.
We have a specialised team of contractor accountants that can point you in the right direction and ensure that everything is setup correctly and as efficiently as possible. We can show you examples of other contractor clients that we are working with and help you to put a plan together moving forward.
If you would like to speak to a specialist contractor accountant, please do get in touch and we’ll get a member of our contracting team to sit down with you to try and understand your business better and help you to keep more of what you earn.
Please phone Kanta on 01902 42 2020 or you may eMail Kanta.