There are advantages and disadvantages to setting up your own limited company or contracting through an umbrella company. Continue reading to discover the benefits of each and to find out whether you are better suited to contracting via a limited company or an umbrella company.
Limited Company
What is a limited company?
Contracting via a limited company is one of the most tax-efficient ways to be paid if you operate outside IR35 legislation. A limited company is a type of business structure with a legal identity of its own, separate from its shareholders and directors. A limited company is a popular legal structure due to its many financial and professional benefits. To enable you to make an informed decision, we will provide an overview of limited company formation’s advantages and potential downsides.
Benefits of setting up a limited company
There are many benefits to becoming the director of your own limited company:
- Working through a limited company is the most tax-efficient way to operate as a contractor, as you can pay yourself a combination of salary and dividends.
- A limited company is a separate legal entity which means, should your company run into trouble, your personal assets are protected.
- Setting up a limited company is more financially rewarding, with more opportunities for tax planning.
- The professional status of a limited company will add credibility and often gives suppliers and customers more confidence in your business.
- Once you have registered your company’s name, no one else is allowed to use it. This protects your business and ensures no one else can trade under the same name – even if you are not currently contracting.
- Registering a business as a limited company can aid the possibility of selling it in the future, which is often difficult to achieve with other business structures.
- Trading through a limited company means you can claim tax relief on various business expenses such as pension contributions, accountancy fees, equipment, and much more!
Disadvantages of setting up a limited company
The most notable disadvantages of setting up a limited company are:
- Limited companies must be incorporated with Companies House, and you must pay an incorporation fee.
- Personal and corporate information will be disclosed on public records.
- Accounting requirements can be complex and time-consuming.
- Strict procedures must be followed when extracting money from the business.
- You must file your accounts with Companies House each year. You must also file accounts, company, and corporation tax with HMRC annually.
Fusion Business Services’ Accountancy Service
Fusion Business Services offers a customisable limited company accountancy service, allowing you to choose the elements you want. If you are interested in finding out more, please call our friendly team on 0800 2294020.
Umbrella Company
What is an umbrella company?
An umbrella company employs contractors working on temporary assignments in the UK. Contractors working inside IR35 legislation often use Umbrella companies as tax and national insurance are deducted at source before you are paid your net salary. Therefore, you do not need to worry about IR35 as you are paid via PAYE – similar to a permanent employee.
When you register with an umbrella company, they will employ you and process your payments for your assignment once they have received the funds from your recruitment agency or end client. As usual, you will conduct the work you are contracted for your end client.
Please visit the government’s website for more information about working through an umbrella company.
Benefits of working via an umbrella company
Using an umbrella company is often regarded as the easiest way to operate as a contractor, and there are many benefits to using an umbrella company to get paid:
- You are paid via PAYE, which means all tax is deducted from your salary and paid to HMRC on your behalf – there is no need to complete a tax return for any income paid through an umbrella company.
- If you use a compliant umbrella company, you will be paid per UK tax law, which eliminates the risk of you owing unpaid tax to HMRC.
- Registering with an umbrella company is very straightforward, and you can be set up and ready for payment in under 15 minutes.
- There is minimal administration when working via an umbrella company as they will take care of invoicing and chasing payments – all you need to do is submit a timesheet.
- Umbrella companies charge a small margin for the work they do. However, this is usually between £15 – £30 a week.
- When you join an umbrella company, you benefit from statutory employee benefits such as sick pay and maternity/paternity pay.
- You will benefit from continuity of employment when you register with an umbrella company. This means you can work for multiple clients simultaneously, and it won’t negatively affect your tax code as you are seen as having one employer (the umbrella company).
Disadvantages of working via an umbrella company
There are some disadvantages when working via an umbrella company:
- Being paid via PAYE through an umbrella company is less tax-efficient than being paid a combination of salary and dividends through a limited company.
- Limited company directors can benefit from tax relief from certain business expenses, whereas most umbrella employees cannot.
- There are a lot of unscrupulous companies posing as legitimate umbrella companies who are promoting tax avoidance schemes – using one of these companies could mean you end up owing HMRC vast amounts of unpaid tax later down the line.
- Instead of setting your own payment terms as a limited company director would, the umbrella company will follow the payment terms set by the recruitment agency or end client. For example, if your end client pays the umbrella company monthly for the work you have completed, the umbrella company will process this payment and pay you each month.
Contact us today to find out about our range of services
If you’re looking for a compliant and reliable services provider you can trust – you’ve come to the right place. Founded by experts with over 20 years of experience in the contractor payroll sector, Fusion Business Services was created to support contractors in the UK with their limited company accountancy and self-assessment tax returns. We also offer a variety of services to help small and medium-sized businesses, including outsourced payroll and landlord accountancy. Please call our expert Sales Consultants on 0800 2294020 to find out more about our services.
