Umbrella company vs Ltd company

sudhirk

I am about to resign my permanent job in IT to become a contractor. I would like to know if it is better to contract the services of an umbrella company to sort out tax or start a limited company. Does anyone know what is the best thing to do? What would give me the best take home income after tax for earnings of £350 per day?

isplumm

sudhirk wrote: »

I am about to resign my permanent job in IT to become a contractor. I would like to know if it is better to contract the services of an umbrella company to sort out tax or start a limited company. Does anyone know what is the best thing to do? What would give me the best take home income after tax for earnings of £350 per day?

Hi,

Well I use my own limited company - believe you have more control - but it is a lot more work - you need accountants, pay VAT etc.

Umbrella companies pay you a salary & you claim 5% max as expenses (I think).

If you go down the limited company route, make sure you go down the VAT route & apply for the Flat Rate scheme - pay 12% VAT - charge 17.5%.

Mark

Chinkle

I would advise you go get an initial free consultation with an accountant, as there's a number of things you need to consider that will be relevant to your own personal circumstances and the way in which you will be contracting including specifically IR35.

chrismac1

First you need to establish for sure - as sure as it is possible to be - that you are truly self-employed. IR35 is currently not being pursued, the OBR are reviewing the whole issue of "false self-employment" with a target report date of mid-March so that any key recommendations can go into the 2011 Budget. But I advise clients to consider the iR35 rules - which are not that much different to the rules in the Construction Industry. It will do no-one any harm to draft and operate contracts as much as they can to fall outside the definition of false self-employment.

Once you've done that I can't see the point in an umbrella company unless your admin. skills are really terrible. But forming your own limited company has many potential benefits other than just a saving in NI - and many potential pitfalls which you should make yourself aware of before taking this step - PM me if you want more details.

SteProud

sudhirk wrote: »

I am about to resign my permanent job in IT to become a contractor. I would like to know if it is better to contract the services of an umbrella company to sort out tax or start a limited company. Does anyone know what is the best thing to do? What would give me the best take home income after tax for earnings of £350 per day?

Hi there

I work for both an umbrella company and a specialist contractor accountant so I'm not impartial but we tend to find that most starting out in contracting go via the umbrella option first.

This is because it allows you to dip your toe in the market first and make sure its the right career path for you. We then tend to find that those who take to it will migrate their business to a Ltd company. Again this is really easy to do and the account you choose to work with take you through it step by step. Most specialist contractor accountants will do this for you as part of the service you are paying for.

It can be tricky to pick the right umbrella company as there are providers out there that are less then transparent.

Sorry for the brain dump but.....

Since the introduction of IR35, the tax advantages of using umbrella companies alongside the special dispensations they receive means that they provide a very cost effective and responsible way for contractors to work and an ideal vehicle for first time contractors finding their feet.
A correctly structured umbrella company should provide a complete professional employment service for contractors which will include a full contract of employment, HR support, guaranteed hours of work, invoicing and timesheet management, tax and National Insurance contributions (PAYE and NICs) and statutory HMRC notifications.
A good contractor focused umbrella will also issue invoices on the your behalf, collect payments from clients/agencies, calculate tax and NI contributions and pay you your net pay direct to your personal bank account, without holding on to it.
Umbrella company employees are also able to claim tax relief on expenses incurred in the course of undertaking their work (travel, subsistence and overnight expenses etc.) which will usually uplift take home pay. To assist them, umbrella companies have negotiated dispensations with HMRC to derive higher levels of operational efficiency. This is achieved by streamlining administrative processes and in some cases eliminating the need for receipts.
A word of warning here though! It has to be acknowledged that there are some unscrupulous providers out there who claim to have dispensations and will abuse them by encouraging you to claim for un-receipted expenses you may not have incurred. This is extremely bad practice and any good umbrella service provider will urge you to claim only for genuine expenses and encourage you to keep all your receipts regardless of any dispensation. You should be able to produce all receipts in the event that the HMRC requests them.
Be wary of claims such as ‘HMRC approved’ or ‘IR35 compliant.’ HMRC does not approve or accredit companies so this doesn’t actually mean anything. Neither does IR35 compliant in the context of umbrella companies as you will be taxed under normal PAYE as an employee.
In addition, with a good umbrella company, you will be fully supported by its HR function in the event of a grievance or disciplinary procedure, be entitled to a package of employment rights and have access to a range of affiliate offers such as discounts on financial and legal products plus other contractor benefits.
Spending a bit of time online doing the research will help you make your selection but don’t rely on the providers’ website for advice as they may not be impartial. There are plenty of good contractor websites though which will have lots of useful advice. It’s worth spending some time lurking on various contractor forums as well. You will soon get a feel for which companies are popular and which have a bad reputation amongst your peers.
Next, make sure you have a clear understanding of each umbrella’s fee structure and identify any hidden costs such as a leaving fee. Does the umbrella charge you a fixed monthly or weekly fee or do they charge a percentage of your gross invoice value? What is included in the fee you are paying e.g. does it include professional indemnity or employer liability cover etc?

The next thing to establish is the umbrella’s payment frequency and its speed of invoicing. How often do they run payrolls in order to ensure their contractors are paid as quickly as possible? And how long does it take to raise your invoice after you’ve submitted your timesheet? All of these factors will impact on how quickly you will be paid.

Ask any potential umbrella which agencies they work with. This will give you some indication as to their popularity in the industry. With that in mind though, some agencies will have a preferred suppliers list (PSL) but remember this is not a recommendation and will not necessarily have been put together on an objective basis. Also find out how long the umbrella has been in business and how many contractors they currently employ, this will give you an idea of their pedigree, i.e. a well run umbrella business that is well established and enjoys a large market share as opposed to a ‘fly-by-night’ provider looking to make a quick profit on the back of your hard work.

Finally, the majority of umbrella companies use online portals for their contractors to upload their timesheets, manage their details and check on the progress of payments and expenses. Ask to see a demo of their portal and make sure that submitting your timesheets will be as easy as they say it will! Make sure that the umbrella you choose to work with has the highest levels of security and treat your log-in information as you would your bank account.

Working through an umbrella should be a hassle free way to work as a contractor and the service provided should allow you to do what you do best, your job! Remember, if you aren’t happy with the services you are receiving you always have the right to leave and move elsewhere.

k1mmie

Having experienced both sides I personally prefer the Umbrella Company route. If you choose the right one it can have just as many advantages.

Our Umbrella company look over all the contracts from the agency first and pick out any anomolies. They advise us on all aspects. Invoice for us and take nearly all the paperwork out of our hands and advise on tax etc.

If you would like their details for a chat to them please contact me.

All the best!

scope

isplumm wrote: »

Umbrella companies pay you a salary & you claim 5% max as expenses (I think).

Not true, I regularly claim 15% expenses , the clue is obviously that you have receipts and dont claim for expenses you havent incured. Unless your contract is outside IR35 I dont think its much in it running your own company, just alot more work. I pay £100 a month to my umbrella company, and that is obviously an expense, so I only pay that - tax.

omen666

I go via a Umbrella Company but mine is slightly different to the conventional ones in the UK. Mine is based offshore in Dubai. I also bank offshore to, this in a roundabout way maximises my income.

Also agree with the above that you are NOT limited to claiming 5% on expenses.

I would start with a Umbrella company, way too muchhassle trying to keep certain receipts and then forgetting to ask for them or losing them etc etc.

Let someone else take the strain

zen.works

I've been contracting in the IT field for almost 6 years now. Always used umbrella but recently going through various threads in this froum made me realise that ltd company route is lot more tax efficient way of doing business.

I know its lot more work involved. But I defenitely need to be more tax efficient and get the max out of my wages. So please point me to the right direction. I've got few queries hope you guys can answer that.

1. My current contract is running for over 2 years now, so I've stopped claiming expenses due to the HMRC 2y rule. If I go ltd company will the same rules apply or is there any way around it.

2. Please suggest any website or forums that talks about ltd company rules and regulations and how to avoid the ir35 trap.

Thanks in advance.

SteProud

zen.works wrote: »

I've been contracting in the IT field for almost 6 years now. Always used umbrella but recently going through various threads in this froum made me realise that ltd company route is lot more tax efficient way of doing business.

I know its lot more work involved. But I defenitely need to be more tax efficient and get the max out of my wages. So please point me to the right direction. I've got few queries hope you guys can answer that.

1. My current contract is running for over 2 years now, so I've stopped claiming expenses due to the HMRC 2y rule. If I go ltd company will the same rules apply or is there any way around it.

2. Please suggest any website or forums that talks about ltd company rules and regulations and how to avoid the ir35 trap.

Thanks in advance.

There are some really useful resourcers at the sites I've pasted below.

Not all contractor accountants are the same so prices do vary. It depends how much support you want/need.

http://www.contractorcalculator.co.uk/Limited_Companies.aspx

http://www.contracteye.co.uk/limited_company.shtml

Same as when choosing an umbrella company though, do your homework

SteProud

zen.works wrote: »

I've been contracting in the IT field for almost 6 years now. Always used umbrella but recently going through various threads in this froum made me realise that ltd company route is lot more tax efficient way of doing business.

I know its lot more work involved. But I defenitely need to be more tax efficient and get the max out of my wages. So please point me to the right direction. I've got few queries hope you guys can answer that.

1. My current contract is running for over 2 years now, so I've stopped claiming expenses due to the HMRC 2y rule. If I go ltd company will the same rules apply or is there any way around it.

2. Please suggest any website or forums that talks about ltd company rules and regulations and how to avoid the ir35 trap.

Thanks in advance.

Sorry I forgot to add that this a great forum for contractors too

www.contractoruk.co.uk