Contractor Accountants - Limited v Umbrella
Whether new to contracting or a seasoned pro there are two options for setting up a payment structure. The two methods are as follows; a one person limited company or an umbrella company.
You need to set up your new business in the best way so that you minimise your long-term tax liabilities, while maximising your income and making it easy for your customers to deal with you.
It is important to emphasise at the outset that the choice does not in any way influence the IR35 status of the contract or modus operandi of the working arrangements. The choice would also not influence any HMRC review or decision as to whether the contract falls within the regulations of IR35.
Setting up and running a limited company, where you become a director and shareholder, is the most tax efficient way of working and has a number of advantages.
In making a decision, the contractor should consider the following points
IR35 Status:
If your contracts are outside of IR35 then from a tax point of view the Limited Company would be the correct option, especially for long term contractor
Presentation/Status:
Is it important to be a Director in your professional life would it help you, if so then the Limited company is the option for you.
Administration:
There is more work involved with a limited company if you are happy to commit up to 30mins each week to the admin of your business then limited company is the choice for you, if you are completely adverse to administration then umbrella would be the most suitable.
Making the right decision based on your own circumstances and requirements will achieve the most efficient result. There is no "always right" or "always wrong" solution - both methods will work for you and achieve a similar result but with different working arrangements.
| Umbrella - Advantages | Limited Company - Advantages |
| Great for first time contractors who require a quick and easy start up to contracting | You are a director of your own company and need to keep Companies House informed of your Company's dealings |
| Very easy to use, you simply enter your timesheet and expense details and wait to be paid. | The most tax efficient way of working |
| Ideal for short term contracts and contracts less than £25k per year | Claim a wider range of expenses |
| Removes the implications and legal responsibilities of running your own Ltd Company. | Access to the Flat Rate VAT scheme. |
| The PAYE umbrella company takes care of all accountancy, administration and taxation matters and chasing for payment of invoices | You keep complete control of your financial affairs meaning you do not have to risk your money with any third party administrator |
| All tax and NI is deducted before you receive your money, so you will have no further taxes to pay. | Running your own business isn't difficult; submit spreadsheets to your accountant - just like umbrella time-sheets and expenses. |
| Insurance policies included as part of the service. | Great opportunity for tax planning than PAYE Umbrella |
| Perfect if you are unsure if contracting is for you and you’re really just in between permanent jobs | Ideal for contractors with complex financial affairs |
| The threat of IR35 is removed. | A wider range of tax benefits are available; including payment by dividends; that attract a lower rate of tax |
| You have full employee status and entitlement to all statutory employment rights | You are your own boss and have complete control over the company and its operations |
| Umbrella - Disadvantages | Limited Company - Disadvantages |
| You will receive a salary that is subject to full PAYE Tax and NI, it's just like being a permanent member of staff again. | Can be costly if you contract for a very short period of time |
| You are reliant on the umbrella company to collect your money from the client or agent and then to pay it on to you. | There is a certain amount of paperwork involved. |
| Not ideal for contracts less than £25k per year |
