Contracting v Limited Company

nikmc

I am just about to complete my first 3 month contract, where I have been using an Umbrella Company. I have been offered an extension of a year, and have heard that it might be better for me to set up a limited company. I don't mind the paperwork side of doing that, but only want to go ahead and do that if it will mean my 'take-home' pay is higher obviously...how do I work out if it's financially the best thing to do?

Two9A

I work through an umbrella at the moment, and have been looking to set up a Ltd myself. The advantage is that you can pay yourself from the company's revenue, which means you can "give yourself" a lower salary than the total value of contracts you have, and pay tax/NI/ENI on that. The rest of the money is held in the business bank account, and is taxed as corporate profit (23% if I recall).

A problem arises if you've only got one contract with one client (as I do): thanks to Gordon Brown, this might fall under IR35 rules and you'd have to pay yourself a market rate instead of minimum wage, losing the benefit of corporation tax on your profits (since you have no profits).

Get some quotes from some company-setup accountants; I've seen figures around 80-120 quid/month for management of everything to do with the Ltd, but if you're willing to deal with the reams of paperwork yourself, you can negate those costs.

As I say, it's something I'm looking into, but I'm not confident that I could successfully avoid getting fined by the Revenue for missing something in my papers :rotfl:

nikmc

Thanks - I guess I'd have the IR35 problem as well because I will only have one client.

SteProud

nikmc wrote: »

Thanks - I guess I'd have the IR35 problem as well because I will only have one client.

Hi there,

I work for an umbrella company and a specialist contractor accountant so I am not impartial but we do have a an online calculator that will show you this.

Happy to direct message the link to you if that's appropriate. You should seek an second opinnion as well.

burnoutbabe

i've been looking into this, and can't see that an umbrella PAYE is that helpful over say direct PAYE from recruitment agency - the costs per month are around £60 or so for the umbrella and my expenses would only be say £200 a month, so £70 saved.

am i looking at it the correct way or is more beneficial to be an umbrella rather than normal PAYE if you have high expenses?

diable

You pay yourself the minimum wage and the rest in dividends, not sure about IR35 but doesn't it come in to affect after two years? I have also just started up my LTD company and VAT registration and am embarking on my first IT contract this way.

isplumm

Hi,

Well I have my own limited company - having been contracting for about 5 years - also make sure my contracts are IR35 compliant ... so outside IR35 - would look @ joining professional contractors group - remember you will most likely need things like professional indemity insurance, a good accountant to run you affairs - you can do some of this yourself - also I would register for VAT - look at the flat rate scheme .... you charge 20% on net, but pay 12-15% on the gross - very simple to do.

I have had a umbrella company, so can not compare - but look @ http://www.pcg.org.uk/cms/index.php - they should be able to advise better - also they are working with the Government to change IR35.

Mark

zeitghost

agree with isplumm. Having one client at a time is not indicative of falling within IR35 (been doing IT contracting myself for around 13 years now).

Also go over to the contractorUK site - specifically set up for IT contractors - they have a news and guides section including information for first-timers plus stuff on bn66, income splitting and IR35. Read the First-timers guide and part 10 has links to their information on IR35 - would advise clicking on those and reading their IR35 resources section (afraid that I dont have the requisite number of posts to post a link but you should find it from the above information)

Tbh I would suggest that anyone wanting to get into IT contracting go there and also to the pcg and read all the guides that they can and learn everything - after all you will be running a business. I am amazed over the past few years how many new people come into contracting thinking they can earn easy money (not saying this is the case here) but don't do the requisite research - some not even reading their contracts before signing them (shudder) and have very little knowledge of IR35 (and often incorrect knowledge about IR35)

PasturesNew

If I were contracting I could reduce my tax by being a Ltd company, because of the travel costs/B&B. In most cases after expenses I'd be on less than minimum wage. An umbrella company would 'force' me to reduce my expenses in order to pay me minimum wage.

I'd still go with an umbrella though as it's an easy in/easy out option, you get a payslip and a P45 at the end; I had a heck of a problem closing my Ltd company down after I'd only had it about a year or so. Not being able to close the Ltd meant I couldn't claim the dole or anything. I think it took 3 years to sort out the mess the accountants landed me in - and they were proper contractor accountants, they'd ticked a wrong box on a return and I ended up with an investigation over an £8k Corporation Tax bill ... which I didn't have and, as I argued all along, I didn't owe.

SteProud

burnoutbabe wrote: »

i've been looking into this, and can't see that an umbrella PAYE is that helpful over say direct PAYE from recruitment agency - the costs per month are around £60 or so for the umbrella and my expenses would only be say £200 a month, so £70 saved.

am i looking at it the correct way or is more beneficial to be an umbrella rather than normal PAYE if you have high expenses?

If you work with a true umbrella company that gives you a full contract of employment (as they should) then you have full access to all the statutory employment rights and HR support and you will be fully covered by all the relevent insurance policies.

You cal also reduce your tax liability by having your legitimate expenses offset against the amount of tax you pay.

For example, if you are paid £1,000 gross and have expenses of £200, then you would pay tax on £800, not the full £1,000.

Umbrellas tend to be be better for first time contractors, those who can't or simply don't want to run a limited company, or those who don't see contracting as a long term career or have IR35 concerns.

We tend to advise that if you are in contracting for the longhaul, earn more then £35K a year and aren't caught by IR35 then you will always be better off with a limited company.

Having said that, we work with over 8,000 contractors, some of whome are on £400 a day rates and don't want the percieved hassle of running a limited.

SteProud

SteProud wrote: »

If you work with a true umbrella company that gives you a full contract of employment (as they should) then you have full access to all the statutory employment rights and HR support and you will be fully covered by all the relevent insurance policies.

You cal also reduce your tax liability by having your legitimate expenses offset against the amount of tax you pay.

For example, if you are paid £1,000 gross and have expenses of £200, then you would pay tax on £800, not the full £1,000.

Umbrellas tend to be be better for first time contractors, those who can't or simply don't want to run a limited company, or those who don't see contracting as a long term career or have IR35 concerns.

We tend to advise that if you are in contracting for the longhaul, earn more then £35K a year and aren't caught by IR35 then you will always be better off with a limited company.

Having said that, we work with over 8,000 contractors, some of whome are on £400 a day rates and don't want the percieved hassle of running a limited.

Sorry, I meant to add that working through an umbrella you will pay both employer's and employee's NI, however the rate you are getting should reflect this and be higher the comparable permenant employee.