umbrella vs limited2018-08-31T14:32:08+00:00

Umbrella vs Limited

Which option is best for you?

Umbrella Company

A PAYE umbrella company employs independent contractors who work under temporary contract assignments. The PAYE umbrella company issues invoices to a recruitment agency (or client) and, when payment of the invoice is made, will pay the contractor through PAYE. All Tax and National Insurance is deducted at source, making the PAYE Umbrella Company the safest way to contract.

Ideal for contractors earning upto £20.00 per hour or £160.00 per day

Pros

  • Great for first time contractors who require a quick and easy start up to contracting
  • Ideal for contractors who require a cost effective management solution for short term or fill in contracts between permanent assignments
  • The threat of IR35 is removed
  • Removes the implications and legal responsibilities of running a Ltd Company
  • The umbrella company takes care of all accountancy, administration and taxation matters
  • You have full employee status and entitlement to all statutory employment rights

Cons

  • Not as tax advantageous as operating your own limited company
  • All income is subject to PAYE tax and NI

Limited Company

When setting up your own limited company, you become a Director who is responsible for the affairs of that company. This will involve opening a business bank account, registering the company for VAT, Corporation Tax, PAYE, arranging appropriate levels of business insurance, invoicing your clients, determining how much to pay yourself; using a combination of salary and tax efficient dividend payments and then ensuring that all company returns and statutory accounts are filed on time.

Whilst the administration burden and Directors responsibilities can be quite daunting, the financial benefits can be a good trade off, particularly if your contracting income is high.

Suitable for contractors earning over £15.00 per hour or £105.00 per day

Pros

  • The most tax efficient way of working as a contractor
  • You are your own boss and have complete control over the company and its operations
  • A wider range of tax benefits are available; including payment by dividends; that attract a lower rate of tax
  • Ideal for contractors with complex financial affairs

Cons

  • You are responsible for:
    • maintaining accurate company accounts
    • ensuring compliance of all company matters
    • invoicing your clients; all aspects of credit control and maintaining an accurate accounting system
  • You’ll need comprehensive Insurance Policies inc. Public Liability and Professional Indemnity Insurance
  • You’ll need to complete a self assessment for tax each year, getting this wrong will be detrimental to your tax status in the long run

Summary

There are a number of factors you need to take into consideration when choosing whether to contract through an umbrella company or your own limited company.

There is no right or wrong way of working, both solutions are perfectly viable, but depend on your working arrangements as to which is best suited to your personal circumstances and requirements.