Umbrella or Ltd?

m139195

The old question....

Anyhow I've just been paid for the first time under an unbrella company and I must say I'm very unimpressed. I have been charged nearly £400 Employment costs (in addition to £26 per week for using their services) for 4 weeks work and this to me seems extortionate. I have asked for an exact breakdown which I'm currently waiting on...

If I were a Ltd co., would these Employment Costs be incurred at all or, if so, surely they would be lower? Has anyone moved from an umbrella to Ltd and regreted it? I know there is more work involved being Ltd but I hear that it is worth it tax wise and much easier these days with on-line firms such as 'Crunch' doing much of the work for you?

I'd be grateful for anyones experiences please, thanks very much.

m139195

Hammyman

The employment costs the umbrella company have deducted are employers NI and other things. Employers NI would be 13.8% of all wages above £136 a week plus there would also be roughly an additional 12% of all pay earned deducted for holiday pay so if you were earning around £400 a week top line, £400 employment costs per month sounds about right. Because you were PAYE before, you were unaware that this is what your employers had to pay above what you earned every week so now you're finding out the true cost of employing someone.

If you had a Ltd Company and you were an employee of it, you'd have to pay employers NI on your wages at however if you were only a director and withdrew wages as a dividend that would be a different matter.

It is never a better idea to use an umbrella company. An accountant wouldn't even charge half of what these companies do.

Ltd hasn't been a tax advantage for standard basic rate tax payers for some years now.

My suggestion to you is to book an appointment with a tax accountant, not a normal one, and spend an hour discussing the best options for you.

SteProud

Hammyman is mostly right.

I work for an umbrella company and a specialist contractor accountant so I am not impartial.

Employment costs are pretty much exactly like Hammyman explained.

Employment costs consist mainly of Employers’ National Insurance Contributions (NIC) but they also include amounts to cover your insurance costs, as well as enough funds in order to pay you should you be on sick leave or maternity leave etc.

The rate of Employer’s NIC is currently 13.8% of earnings above £136 per week.

At the company I work for we calculate employment costs to be 13.8% of the invoice value we raise for your work, minus our margin and the NIC free amount of £136 per week.

If your rate equates to about £35K a year or more and you are outside IR35 you will almost certainly be better of working via your own limited company.

SteProud

My suggestion to you is to book an appointment with a tax accountant, not a normal one, and spend an hour discussing the best options for you.[/QUOTE]

I'd dissagree with this but as I say I'm not impartial.

A specialist contractor accountant (Check out the PCG list) will know the ins and outs of running your own limited as a contractor much better then any high street accountant will and you can usually get incorporated, set up with a business bank account, insured with all the relevant insurance packages, proactive tax planning as part of monthly fee with no add ons.

A couple of independent links to more info below.

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

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

Hammyman

I agree the above suggestion would be better than just a tax accountant if you're getting started for the very first time and would like some guidance on setting up properly.

SteProud wrote:

If your rate equates to about £35K a year or more and you are outside IR35 you will almost certainly be better of working via your own limited company.

One umbrella company, NOVA, state that unless you're earning an invoiceable amount of at least £300 a week and have 25% or more of that as claimable expenses, you're better off not using an umbrella company and I infer from that that you're probably better off on PAYE.

https://www.novacontracting.co.uk/employee/FAQ.aspx

m139195

Thanks SteProud and Hammyman for your welcome contibutions.

I guess even if I went the Ltd route I'd have to pay the Employment Costs to my employer at the same rate - 13.8%? Thats my real bug-bear and if so, I may as well stick with Umbrella.

KiKi

m139195 wrote: »

Thanks SteProud and Hammyman for your welcome contibutions.

I guess even if I went the Ltd route I'd have to pay the Employment Costs to my employer at the same rate - 13.8%? Thats my real bug-bear and if so, I may as well stick with Umbrella.

No, if you have a limited company then it's *your* company that employs you - not the client ("company") you're working for.

You can keep NIC and tax contributions as low as possible by taking dividends as a director of your company instead. Not an expert on that, but I'm sure Hammyman or someone will be able to explain.

KiKi

Hammyman

Kiki is exactly right. If you had your own Ltd company and paid yourself as an employee then you would also have to pay employers NI on what you paid yourself. However if, as Kiki said, you take money out of the Ltd company as a dividend instead of a wage, you only pay income tax.

SteProud

The way most of the contractors who work through us do it is they will pay themselves national minimum wage, that way all income tax and NIC is calculated based on that.

The rest of the money they earn from their contract they can award to themselves as a dividend. This is subject to capital gains tax which is a lower rate then income tax etc so its therefore more tax efficient.

You can also claim legitimate business expenses etc as well. Although you can also do this via an umbrella.

What you always have to bear in mind however is that unless paid as wage or dividend then the money left in the business belongs to the business, its not yours!

Your tax liability can be reduced further by loading money into your pension etc and things like that but a proper contractor accountant will be able to advise you much better then anyone on a internet forum.

scope

Before setting up your own company and pay yourself minimum wage make check weather you are inside or outside IR35, it makes all the difference..