If you are thinking of becoming a contractor but are unsure how to go about it, this article discusses the different ways to operate and gives pointers to help you decide which route is best suited to you.
What are the options available to contractors?
As a contractor, you can choose to work through a PAYE umbrella company or via your own limited company.
If you choose to work through an umbrella company, the company should provide you with a contract of employment. This contract gives you the same rights as someone who is employed. This means you will be entitled to receive sick, holiday, maternity or paternity pay.
As the umbrella company is acting as your employer they are responsible for processing your salary. They will ask you to submit a timesheet and from this, they will calculate your salary minus the correct amount of NIC and tax.
The draw of a limited company for contractors is that their take-home pay will be higher than if they worked through an umbrella company. Limited company contractors have access to a wider range of tax allowances and reliefs, which in the majority of instances makes this the most tax efficient way to operate.
However, being a director of a limited company will add an extra layer of responsibility. You will be tasked with making sure the company is run in a fit and proper manner and that any paperwork and tax liabilities are submitted and paid on time.
The table below explains what to think to about when looking at each option and lays out in greater detail the main advantages and disadvantages of an umbrella and limited company:
|A limited company is suitable for:||An umbrella company is suitable for:|
|► Contractors who intend on making contracting a long-term career choice
► Contractors who earn more than £25,000 p.a.
► Contractors who work outside of IR35
► Contractors who want more control over their finances
► Contractors who want to be their own boss and build their own business
► Contractors who want to work in the most tax efficient manner
|► First time contractors who want the security that employment offers
► Contractors earning less than £25,000 p/a
► People who intend to contract for a short period
► Contractors who don’t want to take care of the admin that comes with running a limited company
► Contractors working inside IR35
|Limited company advantages||Umbrella company advantages|
|► In most cases, it is the most tax efficient way to operate
► Presents a professional image
► You have complete control over the business
► Higher take-home pay
► Can claim for a greater number of expenses
► Choose how you want to get paid – usually a mixture of a small salary & dividends
► Can join the VAT Flat Rate Scheme
|► Contractor receives full employment rights and benefits: sick pay, holiday pay, paternity / maternity pay
► Tax and national insurance obligations are handled by the umbrella company
► No paperwork – contractor only needs to submit a timesheet
|Limited company disadvantages||Umbrella company disadvantages|
|► Extra paperwork and admin of running a company (working with an experienced contractor accountant can dramatically reduce this burden)
► If you are contracting privately through your own limited company, you could be at risk of being investigated under the IR35 legislation
|► Least tax efficient way to operate as you are taxed at source
► You’re reliant on the umbrella company to collect the money owed to you
Any questions about umbrella companies or limited companies?
If you have any questions related to working via an umbrella company or about setting up a limited company our experienced team can help clarify things further. Get in touch via our website or call us on 01962 867550.