As a contractor, having your accounts run through a limited or umbrella company offers you numerous benefits. Before you decide on the structure you want to use, the first thing you need to do is become familiar with what the differences are between them so that you can make an informed decision for your business.
Umbrella Payroll Companies
Umbrella companies act as the employer for contractors. For freelancers and first time contractors it is an easy option. An umbrella company may be your best option if you think you might return to permanent employment in the future or if you are unsure if contracting is suited for you.
Advantages
- There is less administration for you to worry about since it is handled by the umbrella company.
- Your NI and PAYE are calculated and deducted for you before you receive your salary. That means you won’t have to pay those taxes since it is handled for you by the umbrella company.
- You get the same benefits that somebody how is permanently employed gets.
- You just have to submit your time sheet and then wait to receive your paycheck. You only pay for this service after payments have been processed by your umbrella company.
Disadvantages
- Since the umbrella company treats you as an employee, your salary is subject to the full NI and PAYE tax.
- You must rely on your umbrella company to invoice and process on time, and properly.
- It doesn’t support future plans you might have if you decide to get your own business started and build on it. That is because with an umbrella company you are basically their employee.
- Compared to a limited company, when you earn revenue outside of IR35, you may have a higher tax burden.
Limited Company
This type of business structure offers many advantages to the company directors, the shareholders and you. Since your personal finances and the company’s finances are kept separate from each other, there is a limit to your personal liability. That means that if anything should happen to the company that you are protected.
Advantages
- A limited company gives you a professional image.
- When you own a limited company, it gives you the ability to have complete control over your own company’s finances and operate your own business.
- You are able to claim more types of expenses compared to when an umbrella company is used.
- Good tax planning opportunities.
Disadvantages
- You will need to many your own administration.
- You will either need to have an account or spend a lot of your own time handling your accounting issues.
- If you are on contract for only a short time and then make the decision to return to permanent employment, it can end up costing you a lot of money due to the expenses you will incur when closing your limited company down.
- You will have to file a Companies House, which means other individuals, including your competitors, will able to see your information and accounts.
If you want to know more then check out this post on umbrella companies from Charles Hunter.
