The most important decision you will make when setting up business as a contractor, freelancer or consultant, is whether to do so as a limited company or under an umbrella company. Both have their pros and cons. We’ve outlined these below.

 

 

What is a limited company?

 

When you set up a limited company, it’s your own business. Even so, you have limited liability, because the business is a separate entity from you, the owner. This applies even if you own all shares in the business.

 

What are the pros?

 

  • Tax efficiency; retain more profits
  • Claim on a range of expenses
  • Established company name
  • Limited liability
  • Kudos of being a company director
  • Make use of the Flat Rate VAT scheme
  • Submit the majority of your admin to accountants like Accounts Direct
  • Have control over your finances and tax planning, with the help of an accountant

 

 

What are the cons?

 

  • A small amount of monthly paperwork
  • Not recommended if you contract for short periods of time or make less than £25k per annum

 

 

What is an umbrella company?

 

When you set up as a contractor, freelancer or consultant under an umbrella company, they will effectively work as your employer.

 

What are the pros?

 

  • Most paperwork is completed on your behalf. Tax is also automatically deducted.
  • Ideal if you are contracting for short periods of time or make less than £25k per annum.

 

 

What are the cons?

 

  • Obligation to pay full PAYE Tax and NI insurance. Ultimately this way, you do not retain as much of your profits.
  • The Agency Workers Regulations (AWR) of October 2011 means that contractors working more than 12 weeks will now lose even more in profits.
  • Dependence on the umbrella company to deal with your wages.
  • Risk that the umbrella company may go into administration.

 

 

Take home pay

 

Because of the tax relief and expenses claims, you will profit from more take home pay with a limited company than if working under an umbrella scheme.

  • Limited company: retain 75-80% of your contract value
  • Umbrella company: retain 60-65% of your contract value

To give you a clearer picture of the differences in take home pay, we’ve created this table.

 

 

Limited Company

Umbrella Company

Rate per Hour

30

30

Hours per Week

38

38

Days per Week

5

5

Weeks per year

44

44

Salary

8,000

 

Legitimate Expenses

10,400

10,400

Admin Fee

-

1,434

 

Contract Revenue

49,500

49,500

 

Company Expenditures

 

 

Expenses

10,400

10,400

Admin Fee

-

1,434

Gross Earnings

-

37,666

Employer's NI

71

3,660

Gross Pay

8,000

34,006

Total Expenditures

18,471

-

Company Profit

31,029

-

Corporation Tax

6,206

-

Distributed Profit

24,823

-

 

Tax Calculations

 

 

Taxable Income

32,823

25,901

Employees NI

47

3,168

PAYE

-

5,180

Additional Tax on dividends

 

 

 

Personal Income

 

 

Net Annual Income

32,776

25,658

Net Monthly Income

2,731

2,138

 

Annual Take Home Pay

43,176

36,058

Percentage of Total Income

87%

73%

 

As you can see, working under an umbrella company is ultimately more expensive, and puts you in a position of less control over your finances. This may suit you if you only want to work on short contracts, and have no long-term desires to build up your own business. Otherwise, a limited company is probably the right option for you.

 

 

Next Step:

Please contact us if you need further advice, have any questions about our services, would like a free consultation.

Speak to us today. Call: 0333 5775332 or Email: info@account-direct.com

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