Umbrella vs Limited Companies

There is no clear suggestion on which tax structure is better suited without looking into a number of personal factors.

• Your rate of pay
• Your clients' requirements and flexibility with payment options
• Average hours/day of work each week
• The type of work and manner in which you work taking into account the IR35 rule
• How much involvement you wish to have in the process, and your financial astuteness

Payroll or Umbrella Service Company

Payroll/Umbrella companies essentially act as third party employers to contractors and have become an increasingly popular option in recent years. One of their advantages is that you can enjoy many of the benefits of being “in business” along with the convenience of being an employee. Since the Umbrella Company is responsible for all of the back office administration, such as invoicing and payroll, recruitment agencies and clients can afford to pay higher premium or “company” rates to contractors. And yet you will have little or no extra administration to do than if you were a PAYE employee of your agency/client.

• Your agency/client pays into a company of which you are an employee, you receive your income net of PAYE and NI taxes, however you can off-set expenses prior to this tax calculation resulting in a higher take home pay.
• Low involvement on your behalf, and generally considered the “hassle free” option.
• Fees are taken per invoice and there are no set up or closure fees.
• Typically beneficial for individuals earning less than £15 per hour (under £30,000/year).
• Don't forget to claim back your flight cost to the UK if you bought your Kickstart pack before arriving here.

You are able to offset basic work related expenses against your tax through an Umbrella Company. However, you should be wary of other Umbrella Providers who promote “special expense dispensations” without the need to provide receipts. HMRC have made clear their intention to challenge companies that encourage tax avoidance through fraudulent expense claims.

Most Umbrella Companies do not charge set up or exit fees and only take a small administration fee for processing a contractor's pay.

Read more about 1st Contact Umbrella Payroll or Contact Us today for further enquiries or to arrange your free consultation.

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Limited Company

The setting up of a private limited company has long been a popular choice amongst professional contractors/freelancers and can be particularly rewarding for higher income earners and those whose contracts fall outside of IR35. Unlike self employment, a business that is incorporated as a limited company is a separate legal entity to its owners (shareholders). A clear advantage of this is that individual shareholders cannot be held personally liable for any company debts.

• Your agency/client pays into a company you are the sole director and sole shareholder of, which has its own business bank account.
• You pay yourself from this business bank account in a combination of salary, expenses and dividends (the best combination can be discussed with an accountant or financial adviser).
• Medium to high involvement as you are a director of your own company in the UK. Onus is on the director to adhere to all company rules therefore high degree of responsibility.
• Fees involved include set up fees, accounting fees and Companies House fees.
• Ideal for those who wish to maximize their tax efficiency and are earning £15 per hour plus (over £30,000/year).
• 1st Contact Accounting can help set-up a company and assist with easy packaged and bespoke accounting services. Don't forget to mention your came through Kickstart to get your discount for a company and business bank account set-up.

You can choose to draw a salary from your company to suit your own personal financial circumstances. Your director's salary is subject to Pay as You Earn (PAYE) tax and National Insurance (NI) in the usual way. Profits for small companies are taxed at a flat rate of 21%, (compared to the 40% top rate of tax for employees).
The rest of your income can then be drawn as dividends from the company's net profit Dividends do not attract National Insurance and you only pay personal tax on any dividends drawn over and above the upper tax threshold (£43,375).
Furthermore a company can be a very tax efficient vehicle through which to make investments (e.g. into an executive pension).

The UK government has been turning to ever more drastic legislation to counter what they see is widespread tax avoidance by contractors, who they believe are using companies to “disguise employment” and pay business levels of tax when they should be taxed as employees. It is therefore vital for you to seek advice from reputable and regulated accountants to ensure that you stay within the rules and do not become overwhelmed with the potentially costly compliance burden.

Read more about Limited Companies.

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