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Limited vs Umbrella- what’s going to work for me?

By PaperRocket Accounting, Jan 25 2018 01:59PM

So, you’ve made the decision to step away from the world of employment, and enter the new, shiny world of contracting. But, which route is going to be best for you- setting up a limited company, or going through an umbrella company?

Umbrella company

Using an umbrella company is effectively like being an employee of that scheme. It will be the umbrella company that will invoice your end client, and then the umbrella company that will pay you a salary. This salary will be paid to you after deductions have been made in respect of tax and national insurance, as well as any other costs such as expenses and the umbrella company’s fee.

The pros of using an umbrella company are that it is, from your point of view, more straight forward than using a limited company, as you are essentially still being treated as an employee (albeit one of the umbrella company rather than your end client). This is therefore a good option for first time contractors who want to ensure that they have made the right decision before fully committing and setting up their own company, or people who don’t want to have to deal with the admin side of running a company. It is also a good option for people who only intend on contracting for a few months, as it means not having to go through the processes of both setting up and closing a company, which can take time.

However, the cons of an umbrella company are that it is not as tax efficient as having your own limited company as you are required to take your whole income as salary. You are also fully reliant on the umbrella company to collect the money from your client and use it to pay you.

Limited company

By setting up a limited company to contract through, you will become a company director, with full control (and responsibility) over your business. You, via the limited company, will invoice your end client, and then it will be down to you as to how you withdraw those funds from the company (salary/dividends).

The pros of using a limited company is that it is the most tax efficient way to operate. You can choose to pay yourself a low salary and then take the remainder as dividends (which are not subject to national insurance contributions). You can also choose exactly when to withdraw funds from the company, which again has its tax planning benefits. You also have complete control over your financial affairs, and are also able to claim a wider range of expenses through a limited company.

The cons of using a limited company are that it does involve more responsibility on your part as you will have a number of statutory and financial obligations, such as submitting accounts and meeting various HMRC tax deadlines. However, if you appoint a good accountant that specialises in dealing with contractors, then they will be able to take a lot of the hard work off your hands, and ensure that you are able to meet your various obligations.

PaperRocket Accounting provide accounting and tax services to professional limited company contractors and freelancers working in the UK.

We offer our clients a choice of four all-inclusive fixed fee monthly packages which cover all of their accounting and tax needs (so no hidden costs or surprise bills!). All of our accounting packages include a monthly subscription for a cloud accounting software subscription provided by the awarding winning FreeAgent.

Each of our clients is given their own dedicated qualified accountant with unlimited access in person, telephone, or by email.

We pride ourselves on our client satisfaction and customer service and were shortlisted as 'Small Practice of the Year 2016' in the AccountingWEB practice excellence awards, as well as FSB Hertfordshire Service Excellence finalists in 2015 and 2016.

To find out how we can help you please get in touch now.

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