6 Limited Company or Umbrella Company

Umbrella Company or Own Limited Company - What is Best for You?

There was a time when contractors would finish work for the day, then have to complete another few hours of work on the admin for their own limited company. HMRC complex forms, paperwork for their accountants and various other chores. Mind you, for some contractors it can be the better option.

Today, "Thank goodness!" contractors have a choice.

Is an umbrella company the best option for you?

It's worth checking - just to make sure.

Here we investigate whether a contractor would be better off using an umbrella company or paying an accountant to start up their own limited company.

• Which Option is Best for you - Own Limited Company or Umbrella Company?
• What you need to Consider when Running your own Limited Company
• Fed up managing your own limited company?
• Comparing an umbrella company service to managing your own limited company
• Behind the Scenes with an Umbrella Company Managing Director
• What are the Advantages of Running your own Limited Company?
• Contracting Versus Permanent Employment
• What are the Advantages of Using an Umbrella Company?
• Own Limited Company - 24 Month Rule
• Contractors have Never Had it so Good

Since the introduction of the Managed Service Company (MSC) legislation in the budget 2007, the only way an independent contractor can comply with this legislation is to set up his or her own personal limited company or to use the services of a PAYE umbrella company.

Limited Company

A limited company in the United Kingdom is a corporation whose liability is limited by shares (Ltd) This is the most common form of privately held company.

By setting up your own limited company, you become a Director who is responsible for the affairs of that company.

Pros

The most tax efficient way of working providing your contract is outside IR35

You are your own boss and have complete control over the company and its operations

A wider range of tax benefits are available; including payment by dividends; with lower tax

Ideal for contractors with complex financial affairs

Cons

You are responsible for maintaining accurate company accounts

Responsible for ensuring compliance with all company matters

Responsible for invoicing the client, credit control and maintaining accurate records

You must ensure that all company returns and accounts are filed by their respective due dates

Failure to do so, may give rise to late filing penalties being born against the company

You will need to employ the services of a reliable accountant

Maintain various comprehensive Insurance Policies

Complete a self assessment for tax

PAYE Umbrella Company

A PAYE umbrella company employs independent contractors who work under temporary contract assignments. The PAYE umbrella company issues invoices to a recruitment agency (or client) and, when payment of the invoice is made, will pay the contractor through PAYE. All Tax and National Insurance is deducted at source, making the PAYE Umbrella Company the safest way to contract.

Pros

Great for first time contractors, quick & easy

Ideal for contractors who require a cost effective management solution

Short term or fill in contracts between permanent assignments

The threat of IR35 is removed

Removes the implications and legal responsibilities of running your own Ltd Company

All legal, contractual and financial affairs are dealt with by the PAYE umbrella company

You don't accrue fees when you are in between contract assignments

The PAYE umbrella company takes care of all accountancy, administration and taxation matters

You won't have to chase for payment of o/s invoices

You have full employee status and entitlement to all statutory employment rights

Inclusive and full range of insurance cover as standard

Cons

Perhaps not as tax advantageous as operating your own limited company (but then this is subject to certain criteria being met, particularly the application of IR35)

Unless you opt for same day payments, there will be a slight delay (typically 3 working days) before you receive cleared monies into your account, as it needs to pass through the PAYE umbrella company bank account. This presents an element of trust on your part due to the control the PAYE umbrella company has on the money