Umbrella Company -v- Limited Company

TeeMac67

Hi
Wonder if anyone can advise me what is best financially.
I commenced my first contract role and was advised just to go with an umbrella company to get started, however, I am now realising or am being told that this is not the best route to go down financially.

My contract rate is around £140 per day.

What does registering as a Limited company entail.

Looking for some straightforward information -keeping it as simple as possible.

Many thanks in advance.

*~Zephyr~*

Having a limited company means that:

You have to register a new company at Companies house (£15), complete articles of association and memorandum of association.
You are then a director of that company
You will need to keep Companies House informed via submission of accounts and Annual Return (£14)
You will need to pay for an accountant to prepare company accounts
You will be responsible for submitting and paying accurate corporation tax returns (these are horrid - you'll need an accountant)

You will have to submit invoices to the 'employer'
You will need to open and run a company bank account
You will need to run a PAYE system and calculate your personal tax and NI along with Employers NI deductions and pay these over the HMRC
You will have to, as a Director, complete a self assessment tax return each year and submit to HMRC

To a lot of people this is just too much to worry about, so they go down the umbrella company route. Only you can decide if delegating all of the above is worth the £100 a month or so the umbrella company will charge.

To be fair, the umbrella companies do try and be as tax efficient as possible on your behalf. They will pay you back your expenses pre-tax, so your commuting costs, lunch, stationery etc is paid back to you tax free.

Regshoe

There are a few corrections/additions I would make to Zephyr's post above:

1) You don't need to have an accountant prepare the company accounts, but if you don't know what you are doing (and guessing by the initial question, you likely won't, it's not as straightforward as doing a self-assessment) then it is a very good idea to have them prepared by an accountant. Corporation tax returns can indeed be unpleasant though, I recently corrected two that a qualified accountant (albeit not a practice accountant) had managed to get mixed up.

2) If you are comparing umbrella vs Ltd and are working as a contractor there are potential IR35 issues to consider which would be another reason not to try to DIY the accounts/PAYE.

3) You don't necessarily need a Self-Assessment, at £140 a day and assuming no other income sources you won't be a higher rate tax payer, so there should be no additional tax on dividends. So unless there is another reason to require an SA then you don't automatically require one as a director. HMRC often disagree (and are wrong in this), however if they request one and you can't get them to rescind the request then you will have to submit one.

As to Umbrella Vs Ltd+Accountant - it depends how the figures stack up. If it's a very short contract the costs of an umbrella added to their (theoretically) being less hassle means the Umbrella is probably better. If it's long term it might be worth getting quotes from accountants to see if they can beat the Umbrellas.

I have a couple of clients where I am significantly cheaper than most Umbrellas, whilst still making a decent fee rate myself by being efficient and keeping my costs down.

Assuming you are caught by IR35 then one advantage of your own company would be access to the £2k Employers Allowance for a start.

TheCyclingProgrammer

As above, HMRC's advice that directors need to register for self assessment is just plain wrong. If you're a director you only need to register for self assessment if you are chargeable to tax - there is no statutory requirement to register for self assessment just because you're a director.

However, if HMRC decide they want you to do one and send you a notice to file, you'll have no choice - and HMRC do prefer directors to submit one so becoming a director is very likely to trigger an automatic notice to file.

Also, you only need to setup a payroll and operate PAYE if you, as the only employee of YourCo, earns above the PAYE or NIC LEL thresholds (or if you have pension contributions, certain benefits or a second job). However its normal to pay a tax efficient salary before taking dividends and for the current year that's the full £10k personal allowance so you would need to register for PAYE if you go down this route.

The LtdCo is almost always the most tax efficient option as it allows you to take a minimal salary and the rest of your remuneration as dividends which do not incur NI. You also have the flexibility to manage your income as you can choose to only pay dividends up to the higher rate threshold and avoid paying higher rate tax - assuming you can live on that amount of money (with a basic salary its about £3100 a month take-home) and that there is enough profit in the company of course. You can leave the remaining profits in the company for a rainy day.

The advantage of an umbrella is that its straightforward - you are treated as an employee, you are paid via PAYE, the umbrella deals with all of that for you and they charge you a small admin charge. Its often a good option for contractors just starting out and aren't sure if they want to do it full time, or for one-off contracts where the effort of registering a Ltd company would be overkill. Be aware if you use an umbrella and only intend to work on a single contract you probably won't be able to claim any travel expenses as your client's office (if you work on-site) will be treated as a permanent workplace and any travel will be ordinary commuting.

Assuming 5 days a week, 48 weeks a year, £140/day is about £33k gross turnover. IMO if you expect to turnover more than £25k a year then I'd say starting a Ltd co is worth it but that assumes your contract lasts all year.

If you really plan on contracting full time then seriously consider a Ltd - if you're still not sure, start with an umbrella. You can change later.

All of the above does assume your contract wouldn't be caught by IR35 - even when caught by IR35 working through a Ltd company (and ensuring all your contract earnings are paid via PAYE and not dividends) can still work out better than using an umbrella. Of course, if you use an umbrella then you don't even need to worry about IR35.

TeeMac67

Thank you all very much - you have given me good, solid information to enable me to make an informed decision.
Think I may well take the advice and stick with umbrella company for the time-being and consider Limited Company at a later date if the contract work was going to continue.
Appreciate you taking the time to reply to my request for information.

PasturesNew

My quick response is: If you intend to see yourself as a company, for the long-term, providing services, then go down the Ltd route. If you're planning on working as a contractor now as it's the only job going, or for a year or so until you get a "proper job", then go down the umbrella route.

Ltd = responsibilities, hassle, paperwork.
Umbrella = easy in, easy out.

TeeMac67

PasturesNew wrote: »

My quick response is: If you intend to see yourself as a company, for the long-term, providing services, then go down the Ltd route. If you're planning on working as a contractor now as it's the only job going, or for a year or so until you get a "proper job", then go down the umbrella route.]


Thank you - that was the conclusion I came to.

Although, "proper job" ?? I think I have one of those
Permanent? No
Proper? Yes:rotfl: