Deciding whether to use and Umbrella company or a Limited company can be a difficult process for contractors but this article will hopefully highlight the advantages and disadvantages against both. Whilst ‘freelancers’ can work in many different ways, contractors have significantly less choices in how to operate. Contractors work on fixed term agreements with clients, and due to industry and employment status conventions, the contract is almost always signed between the client and another company. This company being the contractor’s own limited company, or an umbrella company. But choosing which one is the contractor should use is the difficult bit.
Tax-wise, a limited company is the most tax efficient structure to use for contractors. A contractor will take a small salary (generally below the NIC cutoff), and take the majority of his wage in the form of dividends from the company. Any contractor that uses an umbrella company however will receive his wage solely in the form or a salary, which would be liable to normal national insurance and income tax laws.
If a contractor is under the IR35 rules, the benefits of working as a limited company are significantly reduced, however there are still various benefits for example being part of the Flat Rate VAT scheme and being capable of claiming for some expenses that umbrella company employees can not claim for. A lot of contractors may believe that the pluses don’t outweigh the ‘hassle free’ lifestyle which accompanies being an umbrella company employee.
Limited comparisoncontractor are also responsible for the administration of the organisation, dealing with Companies House and the company accounts. This issue can be avoided with the use of an expert accountant that specialises in contractor accountancy which can assist in taking the majority of the worry away from the contractor so they have to do only a small amount of administrative work. Umbrella company contractors, in contrast, have almost no paperwork to worry about, one of the key factors that make this business structure so attractive to contractors.
Generally speaking, umbrella companies provide a good option for contractors who may wish to try the contracting route, or simply have a one-off job, or very short term contract opportunity. When deciding on an umbrella company scheme, be careful about any statements declaring how you can “earn money from expenses”. This is incorrect as legally, you can only reclaim expenses which have been incurred solely during the course of your contracting duty. As a limited company contractor however, you will have greater control over what you do – both in terms of administration, and financially, than you would as umbrella company employee. This would probably be a good choice should you need to require a more ‘professional’ image in any other business affairs you may have.
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