Pointers for my research on contracting PAYE vs umbrella vs "Ltd"

Milky_Mocha

Hello. I'm employed, looking to go contracting. I'd appreciate any pointers on where I can get an unbiased comparison between using an umbrella company vs going the limited company route and how much money I'd make with either option compared to PAYE. I want to check whether it's worth it financially for me. I know what my potential day rate could be as a contractor.

I've done several Google searches but the results tend to be from companies offering one of those options hence advice may be biased. I'm also having a hard time discerning what's against the law and what's not. Is there a government site for example, or any advice you can share based on your own research or experiences? Many thanks, all.

paddyrg

There used to be tax advantages of contracting as a limited company, now you save a bit of NI and that's it. Compared with the grand a so a year you'll pay in accountants fees (Limited company year end accounts are too complex for most individuals, much worse than personal tax). You'll also need insurance policies.

All being equal, go PAYE. It means you'll have access to other employee benefits which often are (or at least should be) denied to contractors - from pensions to staff discounts to canteen access to medical centre to sick pay to maternity pay to holiday pay to... Well, you get the idea. It's not all about the headline rate.

Milky_Mocha

No more tax advantages?! That's news to me.
So contracting is no longer considered self employed?
😢

paddyrg wrote: »

There used to be tax advantages of contracting as a limited company, now you save a bit of NI and that's it. Compared with the grand a so a year you'll pay in accountants fees (Limited company year end accounts are too complex for most individuals, much worse than personal tax). You'll also need insurance policies.

All being equal, go PAYE. It means you'll have access to other employee benefits which often are (or at least should be) denied to contractors - from pensions to staff discounts to canteen access to medical centre to sick pay to maternity pay to holiday pay to... Well, you get the idea. It's not all about the headline rate.

HappyMJ

Save a little bit of NI?

I save a lot of NI.

You do not really need an accountant. I do not use the services of an accountant. My Ltd. company issues 26 invoices a year so it's quite easy to add them up and that's the income sorted. I have several expenses and it's just a matter of adding them up and putting that on the tax return. Payroll is easy enough to manage. I pay myself £112 per week. There is no income tax or NI to pay. I pay corporate tax on the rest and pay it out as a dividend.

getmore4less

Any money you withdraw is taxed very similar when you add up all the taxes.

What you save is 12%/2% employer NI and 13.8% employer NI on much of the money and can access better expenses so pay for some things gross.

Umbrella margin and accountant fees for Ltd should be broadly similar.

agrinnall

Milky_Mocha wrote: »

No more tax advantages?! That's news to me.
So contracting is no longer considered self employed?
😢

IT contracting, which I did for 11 years back in the 90s and 00s, was almost never considered self employed - clients simply would not take on a self employed person because of the risk that they would be regarded as the employer by HMRC.

When I started nearly everybody went the limited company route, but umbrella companies became a lot bigger around the time that IR35 came along. Some people on the Saving Tax board consider that IR35 is pretty much a dead duck and advocate using the low salary plus dividends method that I used when I first contracted, but I can't say whether that view is a valid one.

Milky_Mocha

Does saving a lot of NI reduce your pension pot?

HappyMJ wrote: »

Save a little bit of NI?

I save a lot of NI.

You do not really need an accountant. I do not use the services of an accountant. My Ltd. company issues 26 invoices a year so it's quite easy to add them up and that's the income sorted. I have several expenses and it's just a matter of adding them up and putting that on the tax return. Payroll is easy enough to manage. I pay myself £112 per week. There is no income tax or NI to pay. I pay corporate tax on the rest and pay it out as a dividend.

Milky_Mocha

So companies like contractor angels who offer 81% retention and First 4 Contractors who offer 90% retention, using "unique" tax solutions....illegal? Loophole? Or just clever accounting?

tacpot12

You won't find a definition of what is legal, just guidance from HMRC on what 'self-employment' looks like when compared to employed by someone else.

Most contractors are 'employed' according to HMRC guidance, but HMRC doesn't have the resources to investigate more than a fraction of the contractors there are. The fact that the Government and HMRC use contractors themselves makes a mockery of any moral view on their parts. But ultimately it does come down to a moral decision. How much tax do you want to pay vs. how much risk do you want to take of being caught?

The 'moral' position is if you work for one employer and put no significant capital into the business, you are not self-employed, so you should really pay the tax that the employed pay. You can do this via a Ltd company that you own, and that gives you control of the benefits package you receive. At least then you don't have an umbrella company between you and the agency. The agency factors your invoices for you as part of their fee, so there is little benefit to an umbrella company unless you really hate paperwork.

When I was contracting, I paid myself £40K a year salary and took most of the remainder as pension contributions, and perhaps £8K in dividends. Plenty enough to live on and I figured that HMRC would prioritise companies with a turnover off £80K a year where the salary bill is less than £10K a year!

BTW: I found running my Ltd. company helped me develop marketable skills within the field I was contracting in.

If you want to go contracting, go. It is quite liberating. My extra pension contributions mean I can retire at 53!

Milky_Mocha

Tacpot12....so the more you earn as a contractor, the more likely you are to be investigated and found guilty by the tax man and the key is achieving the right balance between what you are paid and how much you withdraw...but what happens to all the money that you don't withdraw??

motorguy

Milky_Mocha wrote: »

Tacpot12....so the more you earn as a contractor, the more likely you are to be investigated and found guilty by the tax man and the key is achieving the right balance between what you are paid and how much you withdraw...but what happens to all the money that you don't withdraw??

Earnings relative to tax paid is what the tax man will look at, not earnings.

If you're only paying 10% then thats going to attract attention.

I have been contracting since Dec 2014 and its been going great. Had a much better than expected first year and this year has been great so far too.

I've my own LTD company, and i pay an accountantant around £100 a month+VAT.