There has always been a question for a contractor whether to operate their business through a limited company or an umbrella company.
Umbrella Company is a structure where a contractor will effectively become an employee of that Umbrella Company and submit weekly or monthly timesheets for the work done. In turn they will get paid through PAYE scheme after deducting some administrative fees.
Limited Company is a structure where a contractor forms his/her own limited company by becoming its director & shareholder and invoice his agency company or direct client for the work done in weekly or monthly basis.
The easy way of getting to this decision is by assess the two main aspects which are Money and Time.
Money – In terms of take-home pay, running your business through a limited company will give highest return because it allows you to claim a wide range of expenses, for e.g., travel and subsistence, training and course fees, professional subscriptions, computer hardware & software, business telephone & internet, postage, accountancy fees plus any other business costs. But it will require proper tax planning to reduce both Income tax through Pay As You Earn (PAYE) and Corporation Tax. In addition, you can take advantage of Flat Rate VAT scheme through this structure if your annual income is within the threshold of this scheme.
If you engage under umbrella companies, you will be paying both PAYE and National Insurance (NI) as an employee of that umbrella company, although you can still offset some of your work-related expenses such as travelling and subsistence cost. It is usually recommended to work through this structure, if the contract is less than £25,000 per annum.
Time – The prime benefit of Umbrella company structure is that you will have very few obligations to compile legal and regulatory responsibilities such as HMRC and Companies House filings. Also, there is little or no paperwork involved in comparison to limited company structure where it is required to archive the accounting records for at least 6 years.
As an owner and a director of limited company, it is your duty to ensure all the tax affairs are up to date i.e. both corporation and personal tax matters. However, these responsibilities can be reduced/transferred by appointing an accountant who can help to look after you in these matters.
These are two key aspects but there are other factors to consider before taking decision to whether to go with Limited or Umbrella company structure such as Contract length, IR35 and MSC legislation, Benefits and holiday pay.
To ensure whether you have made the right choice, we could assist you for which please get in touch us at your earliest. For more information or advice, please Contact Us.
By Roshan Malla