Umbrella or Limited Company?
Umbrella Company (Payroll Service)
An umbrella company is essentially a way of avoiding the administration duties for contractors normally associated with contracting. Contractors who work through an umbrella company service will submit timesheets and expenses and then leave the rest for the umbrella company. They will pay you a net amount directly to your bank account after deducting tax and NI.
Naturally, there is a fee for providing an umbrella service which can vary hugely between one company to another. Contractors who are currently using an umbrella company service, or looking to, should note that from 6th of April 2016, contractors will no longer be able to claim travel and subsistence expenses through an umbrella company which reduces the benefits of this structure even further.
Limited Company
Majority of contractors when starting to contract end up working through their own limited company as this is the most tax efficient method to have control over your income and bank accounts.
Provided your contract doesn’t get caught within IR 35 you may draw dividends from the company which are not subject to National Insurance contributions.
One of the benefits of working through a limited company is advantage of flat rate vat scheme. For example, as a contractor you would charge your clients your day rate plus 20% VAT but only pay back HMRC in your first year 13.5% and 14.5% in subsequent years of the gross amount (Day rate plus VAT).
This provides the following extra income on top of your day rate (based on 46 week a year of work)
Contractors working through a Limited company and provided their contracts are outside IR35 will have the following benefits:
Rhodes Accountants and Business Advisers can help you setting up a limited company and help you plan the most tax efficient way of earning while working as a contractor. Please see our Services & Pricing page for more information on the services we provide or alternatively, please feel free to contact us at [email protected] or call us on 07791590341.
An umbrella company is essentially a way of avoiding the administration duties for contractors normally associated with contracting. Contractors who work through an umbrella company service will submit timesheets and expenses and then leave the rest for the umbrella company. They will pay you a net amount directly to your bank account after deducting tax and NI.
Naturally, there is a fee for providing an umbrella service which can vary hugely between one company to another. Contractors who are currently using an umbrella company service, or looking to, should note that from 6th of April 2016, contractors will no longer be able to claim travel and subsistence expenses through an umbrella company which reduces the benefits of this structure even further.
Limited Company
Majority of contractors when starting to contract end up working through their own limited company as this is the most tax efficient method to have control over your income and bank accounts.
Provided your contract doesn’t get caught within IR 35 you may draw dividends from the company which are not subject to National Insurance contributions.
One of the benefits of working through a limited company is advantage of flat rate vat scheme. For example, as a contractor you would charge your clients your day rate plus 20% VAT but only pay back HMRC in your first year 13.5% and 14.5% in subsequent years of the gross amount (Day rate plus VAT).
This provides the following extra income on top of your day rate (based on 46 week a year of work)
- £200 per day contract - £1,748 extra in the first year - £1,196 a year thereafter
- £300 per day contract - £2,622 extra in the first year - £1,794 a year thereafter
- £350 per day contract - £3,059 extra in the first year - £2,093 a year thereafter
- £400 per day contract - £3,496 extra in the first year - £2,392 a year thereafter
- £500 per day contract - £4,370 extra in the first year - £2,990 a year thereafter
- £600 per day contract - £5,244 extra in the first year - £3,588 a year thereafter
Contractors working through a Limited company and provided their contracts are outside IR35 will have the following benefits:
- Greater control over finance and tax planning
- Access to brooder scope of expenses than using umbrella company
- No National issuance to pay on dividends
- Benefits of flat rate VAT scheme
Rhodes Accountants and Business Advisers can help you setting up a limited company and help you plan the most tax efficient way of earning while working as a contractor. Please see our Services & Pricing page for more information on the services we provide or alternatively, please feel free to contact us at [email protected] or call us on 07791590341.
