Contracting through a Limited Company
Setting up a limited company can take as little as 5 minutes and your company can be formed within a few hours. You will need to open a business a bank account, chose an accountant and set up your Limited Company Contract, which can either be directly with the client or with an agency. The main benefits of using your own limited company over an umbrella company are savings on National Insurance, the Flat Rate VAT Scheme and the advantage of being able to claim tax back on a wider range of expenses. This is the most tax efficient method of contracting and means that you keep more of your hard earned money.Contracting through an Umbrella Company
Operating through an Umbrella Company means that you essentially become an employee of that company. You will be required to submit time sheets to the umbrella company who will then invoice the client and you will be paid as a PAYE employee for your work, minus the umbrella company’s fee. In this case, you can usually claim some basic expenses, however be aware of umbrella companies advertising dispensations or expense policies ‘approved by’ HM Revenue and Customs (HMRC) that claim to allow expense claims without the need to produce receipts. HMRC intend to challenge any company believed to be actively encouraging tax avoidance through fraudulent expense claims.Earnings for each method
If you chose to work as a contractor through a limited company, you will take home around 75%- 80% of the value of your contract. However, if you chose to operate as an umbrella company you will typically take home around 60% - 65% of your contract rate, See the breakdown below for an idea of how much you could take home as a contractor in each scenario.|
Daily Rate |
Limited Company (Monthly take home pay) |
Umbrella Company (Monthly take home pay) |
Monthly Savings (by going limited) |
|
£200 |
£2,700 |
£3,400 |
£700 |
|
£300 |
£3,900 |
£5,000 |
£1,100 |
|
£400 |
£5,100 |
£6,500 |
£1,400 |
|
£600 |
£7,300 |
£9,500 |
£2,200 |
Summary of the pros and cons:
Limited Company
Advantages
- The most tax efficient method of contracting.
- Wider range of expenses available to claim.
- Access to the Flat Rate VAT Scheme.
- Control of your financial affairs is all yours with no involvement of third party administrators.
- Submitting spreadsheets to your accountant is a simple process.
- Greater opportunity for tax planning than PAYE Umbrella.
Disadvantage
- Paperwork and administrative duties must be completed by you, usually around 10-15 minutes per month.
- Costly option if you to choose to return to employment after only a short period of contracting.
- Not ideal for contractors earning less than £25k per year.
PAYE Umbrella
Advantages
- Very simple process of submitting timesheets and expenses before being paid.
- All tax and NI is deducted for you before you receive your pay so you have no further taxes to pay.
- Ideal for contractors earning less than £25k per year.
- Ideal for short term contractors or contractors still deciding if interim employment is right for them.
- All paperwork and administrative duties will be done by the Umbrella company.
Disadvantages
- The most expensive method of contracting as your salary is subject to full PAYE Tax and NI, much like being a permanent member of staff.
- You are reliant on the umbrella company collecting and passing on your pay from the client.
