Umbrella Company vs. Ltd Company
As a new contractor, one of the first things you will need to sort out is how the payments from your agency or client will be processed. Will you find an Umbrella Company to act as your employer and sort it all out for you or will you take on the burden yourself, open a Limited Company and be responsible for running your own business?
Umbrella Company or Limited Company
The following points will help you decide which route is best for you.
If your initial contract is short i.e. less than 9 months and you are not sure that contracting will be the career path for you, an Umbrella Company would be the wise option. As the Umbrella Company is your employer the instigation and termination of the relationship is no more complicated than with any other job. However, the set up of a Limited Company involves work and cost for both the contractor and the accountant, as does the closure of the company. Set-up is typically around £150, then usually a monthly fee of about £100; the contractor will also incur an additional cost from the accountant when they close the company which varies according to the level of work involved.
As well as setting up a limited company, you will also need to open a business bank account which can take anything up to 6 weeks. Obviously this can have a negative impact on your cash-flow; an Umbrella Company pays directly into your personal bank account which avoids any delays with your pay.
Under the Managed Service Company (MSC) legislation, a contractor’s accountant can only do so much work on their behalf, which means that running a limited company will involve certain responsibilities. These include preparing and issuing invoices, collection of funds, payroll and end of year company returns to HMRC such as P35, P11D and self-assessment to name a few. You also have the added pressure that if the annual returns aren’t completed correctly, HMRC will impose a penalty on you/your company.
An Umbrella Company doesn’t fall under the MSC legislation because it processes contractors’ pay through PAYE; therefore all the responsibilities described above fall under the remit of the Umbrella Company.
IR35 becomes an issue if you are operating through your own Limited Company. Operating outside of IR35, when you are in-fact working as a ‘disguised employee’ of the end client can have severe consequences if you are investigated by HMR&C. When it comes to choosing an accountant, a standard high street firm won’t have sufficient understanding of the tax issues involved in running a contracting business. You will instead need to appoint a specialist contractor accountant who is familiar with the industry.
An Umbrella Company removes the burden of IR35. By operating as an employee of an Umbrella Company, the IR35 rules do not apply to you. This means you can work as a contractor without the worry of any additional tax bills and penalties.
As a Limited Company contractor, you will be responsible for making sure your tax payments are correct and made on time. HMR&C will impose a penalty if the payments are incorrect and charge interest on any late payments. Depending on how you pay yourself through the company, there are two types of tax payments:
PAYE income tax is payable monthly and must reach HMRC by the 19th of the month following the month you were paid.
Corporation tax won’t need to be paid until 18 months after your company begins trading; however this means you need to have the discipline to retain enough money within the company so that you can pay the bill when the time comes. In addition to this, you will also need to pay 6 months corporation tax in advance at the start of the second year of your company trading.
An Umbrella Company will deduct the necessary tax and National Insurance contributions from each and every payment they process for you and file the payments to HMR&C. This ensures you aren’t left with any additional tax liabilities at the end of the financial year.
If your annual contract income exceeds £67,000, you will need to register your Limited Company for VAT. VAT needs to be paid quarterly so you will need to make sure you have saved enough money to pay this every 3 months. An Umbrella Company will take care of all the VAT liabilities so you do not need to.
If you are ready to be responsible for running your own company, as well as sourcing and negotiating your next contract/renewal, setting up your own Limited Company is ideal for you.
If you simply do not have the time or energy to do all the above yourself, let an Umbrella Company assist with managing your financial affairs. It is the hassle-free option to make your life as a contractor just that little bit easier.
If you would like to discuss how our Umbrella service can help you, please do not hesitate to contact a member of our team on 01206 713 680 or email us at firstname.lastname@example.org.