Making the decision between Umbrella or Limited Company? |
Posted: December 14, 2017 |
Once choosing the move into the IT contracting world, the first job is to find the best way to operate and maximise their take home pay. The main two business structures that contractors use are the limited and umbrella company, here we will explain them both in more depth and how their structure works to benefit you. Limited Company Setting up your own limited company you are the company director. Along with this comes many financial and statutory responsibilities such as; annual accounts to Companies House, meet HMRC deadlines along with Personal Tax Returns and many other obligations. To solve any complication in taking on this legal work and running your company, a specialist contractor accountant can be hired to do so. Most contractors operate through their own limited company, and there are plenty of contractor accountants that would be extremely willing to teach you the ropes. The most established benefits of working as a contractor via a limited company is that is definitely the most tax efficient way to operate. This is due to paying yourself a low wage (usually minimum wage) and the rest is drawn out as dividends. Dividends is not subjected to NIC (National Insurance Contributions) therefore, giving you a huge tax saving. Becoming a company director, you will have a massive amount of flexibility over when to take income out the company, which you can take further tax planning benefits, such as transferring shares to a business partner or spouse. Limited companies must pay VAT to every invoice and Corporation Tax on their annual profits (at a rate of 20%), after you have reclaimed expenses on any company purchases. Getting started is a quick process nowadays along with being inexpensive. Directly incorporating with Companies House is under £12, although most contractors higher an accountant to do so. As they can also take on other important initial tasks, such as registering the company for VAT and Corporation Tax along with setting up company payroll. If you require more information on this please read our guides to contracting via a limited company, and view our contractor accountant comparison table.
Umbrella Company Due to the tax legislations recently implemented, the umbrella company option for contractors has only seen a growth in the past decade. Becoming a contractor through an umbrella company, makes you an ‘employee’ of the scheme. You must submit your timesheets and the client pays the scheme and you will receive your monthly or weekly salary minus National Insurance, Tax, expenses, the umbrella fee along with any other pre-agreed costs. This is not the most tax efficient business structure compared to the limited company option but it does save a lot of admin hassle and potential stress says one of the senior managers at BlueBird Accountancy. It also is beneficial to contractors who have shorter term contracts or on a lower rate of pay just wanting to test the contracting world before setting up a limited company. Comparison Calculator
IR35 Considerations If you are contracting it is most likely you have heard of the tax legislation IR35- the benefits of contracting have massively been reduced to this and due to this an umbrella company could be the most profitable option. The legislation came into effect 2000 once the Government came to realise that there were many contractors ‘disguising their employment and claiming expenses where they were in fact acting as an employee but enjoying the tax benefits of a limited company. Thanks to Paul from PWD builders oxford for his invaluable insights
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