As a contractor, there are a number of working options available to you – the right choice will depend on your personal circumstances and preferences. Many contractors need to consider limited vs umbrella contracting. We’re here to help you decide whether to join an Umbrella company or set up your own limited company.
Both limited company contracting and Umbrella employment have advantages and disadvantages so it’s important to understand what’s involved and the implications for your take-home pay before you make a decision about which working option will suit you best.
Comparing your take-home pay
When you compare the difference in take-home pay then limited company contracting will be more lucrative. This is because of there are tax efficiencies available when contracting through your own limited company. As a company director you will be able to claim back a wider range of expenses on business-related costs, and this will reduce your tax liability. You may also be eligible to use the flat rate VAT system which enables you to retain some of the VAT you receive.
While being an employee of an Umbrella company will involve less administration, it comes at a price because the Umbrella company you join will take a fee, known as ‘retained income’. Also, you will have to pay tax under the PAYE system, just like any other employee, and you can claim fewer business-related expenses.
Joining our Umbrella company is extremely simple as you will only need to sign a contract of employment and then begin work. The Umbrella company will take care of your PAYE tax and your National Insurance contributions. You’ll still be able to switch seamlessly between contracts and carry out assignments of any duration.
Setting up and running a limited company is slightly more complicated in that you need to submit details to Companies House when you form the company, and then you need to submit annual records to Companies House and accounts HMRC. You’ll also need to ensure that any contracts you undertake comply with IR35 legislation. However, our limited company contracting service will help you take care of administration.
When you join an Umbrella company you will be entitled to benefits such as sick pay and holiday pay and you’ll have rights to maternity/paternity and adoption leave, just like any other employee. You’ll also be able to join a company pension scheme and build a record of continuous employment which is important when seeking mortgages and other loans.
If you contract through your own limited company, you will need to make your own arrangements to cover time off for holidays and sickness etc, and you’ll need to make your own pension provision if you so wish.
What to do next
For a complete picture you can read our Guide to Your Working Options, or you can get in touch to speak to one of our expert contractor accountants who will be able to offer bespoke information and guidance, as well as detailed pay illustrations.