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Limited Company or Umbrella Company – which is right for you?

Business woman is confused, Thinking business woman surrounded by question marks

If you’re looking for a career change and have decided to work for yourself, Tax Agility’s accountants can advise you on the best contracting option for your business.

Before starting out as a freelancer or contractor, it’s worth taking some time to decide if you should set-up a limited company or register with an umbrella company.

Deciding which route to take often comes down to your requirements, the level of control you want, your long-term business strategy and the type of operations that you’ll be undertaking.

At Tax Agility, we believe that there is no right or wrong decision when it comes to choosing between a limited and an umbrella company. If in doubt, our expert accountants for contractors can help you understand what your business requires to determine the best course of action for you. With years of experience in helping contractors across London, we can provide you with solid guidance and advice so that you can make an informed decision.

Contracting through a limited company

A limited company is a type of business whose legal standing is independent of its shareholders and directors. Setting up a limited liability company can take only a few hours. It involves choosing a name for your company, submitting the required documentation to Companies House, and registering with them once the documents have been approved.

Setting up your own limited company means that you are in control, and your personal finances will be separate from your company’s finances. In the event that something goes wrong with your company, your personal finances will not likely to be affected. However, it is also important to understand that setting up a limited company means that you will be in charge of managing your administrative and legal obligations for the company.

Is a limited company the right option for you?

If you are planning on contracting for a long period of time, a limited company could be the most tax-efficient way of working – as it allows you to claim various expenses and pay yourself a combination of salary and dividends (a sum of money that a limited company pays out to someone who owns shares in the company, i.e. a shareholder) to benefit from the tax free allowances available to each. You can also make tax-free pension contributions through the company and leave funds within the business to grow and expand.

On the other hand, a limited company is costly to set-up (more so than registering with an umbrella company). Also, there is some administration involved in running a limited company even with an accountant for contractors supporting you. For example, you will need to keep track of your income and expenses, such as receipts and invoices, as the information is required for the submission of your year-end accounts and tax returns.

It is worth noting that if you fall within the IR35 legislation, the tax benefits of a limited company will completely disappear. IR35 is a tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary were not used. By falling on the wrong side of IR35 due to your working arrangements, you can end up paying tax and National Insurance at the same rate as a permanent employee. To understand more about the IR35 legislation, you can check out this post, What does IR35 legislation mean? 

Contracting under an umbrella company

Contracting under an umbrella company means that you are considered an employee of the umbrella company. You will need to submit timesheets to the umbrella company which will then invoice the end client or agency for the work that you have completed. In terms of salary, you will be paid as a PAYE (Pay As You Earn) employee minus the umbrella fee, which the company will charge each time you receive a payment. Contractors who prefer no administrative duties generally favour this type of contracting route.

Is an umbrella company the right option for you?

An umbrella company frees you of all the administrative and financial responsibilities that come with being a contractor, meaning that you don’t have to manage or pay your taxes or National Insurance, allowing you to focus on your work.

You will work under a form of employment contract, which still guarantees you the benefits offered to permanent employees, such as holidays, sick leave, maternity and paternity pay.

However, the biggest disadvantage of working with an umbrella company is that they charge a substantial sum of administrative fee, as they take care of your timesheets, billings, PAYE and National Insurance. As such, this option is only suitable for contractors who are new to contracting or work on short-term contracts.

Tax Agility accountants for contractors

Before taking the leap into contracting, contact one of Tax Agility’s specialist accountants for contractors and discuss the options that are best for you given your individual circumstances.

It is also worth checking out these pages written specifically for contractors:

If you choose to set-up a limited company, we will work with you to ensure that you understand what is required of you in terms of your financial and tax obligations, so that we can try to maximise efficiency and minimise your tax obligation where possible. We can also assist you with registering with Companies House, and subsequently, assist you in bookkeeping and accounts so you can concentrate on your business.

If you are already a contractor and want to increase your take-home pay, need assistance with adhering to regulations (such as IR35), or help with your ongoing accounts and bookkeeping, contact us today on 020 8108 0090 or get in touch via our contact us page to arrange a complimentary, no obligation meeting.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.