Advantages and disadvantages to using Contractor Limited Company and Umbrella Company
Advantages and disadvantages to using Contractor Limited Company and Umbrella Company structures, which we will address here.
1. Contractor Limited Company
Most contractors set up their own limited companies to undertake contract work. The main benefit of contracting via your own company is that you can make significant tax savings compared to umbrella company contractors and permanent employees.
If you work via a limited company, you will derive most of your income in the form of dividends (which do not attract any National Insurance Contributions), and a modest salary.
You should sign up to use a specialist contractor accountant, who will take care of all your legal and statutory obligations as a contractor.
Although your accountant will take care of you tax a legal administration, you should remember that as a limited company director, you are ultimately responsible for ensuring that you submit your accounts and other paperwork accurately, and on time.
In terms of administration, you will have to spend an hour or so a month updating your records, invoicing clients, and sending your paperwork to your accountant. However, and ‘hassle’ you suffer is very small compared to the tax benefits of being a limited company contractor.
2. Contractor Umbrella Company
Many contractors decide to work via a contractor umbrella company, which is very much, the ‘hassle free’ route to take.
All you need to do once you sign up to an umbrella service is to submit your timesheets and expenses claim online, and your umbrella will take care of all your administration, and pay you a regular salary net of tax and NICs.
This is not the most tax efficient way to contract, as you will be liable to pay full income tax and NICs on your entire income. You cannot take advantage of the tax benefits associated with working via a limited company.
If you are contracting on a short-term job, then an umbrella could be the ideal solution for you, as it is so quick to put in place.
If your contract work is caught by the IR35 rules, then the tax benefits of working via a limited company are very much eroded, and an umbrella company may be the best solution for you.
Whatever structure you decide to use, you are unlikely to regret your move into the contracting world. Once you take the jump, you are very unlikely to return to the permanent world!
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