You may just be starting up as a contractor or you may already be a seasoned pro, but there are two options for creating a payment structure that you must take on board; either as a one person limited company or under an umbrella company. Setting up properly as a contractor not only minimises long-term liabilities over tax, but also maximises your income while allowing swift and easy dealings with potential clients and customers.
It should be noted and emphasised at this point that whatever option is chosen, no influence on the IR35 legislation will be registered. Nor will it influence the contract (or modus operandi) of the working arrangements. The choice between umbrella and limited company also won’t affect or influence any of Her Majesties Revenue and Customs reviews or decisions as to whether your contract or working agreement falls within regulations of IR35.
The most tax efficient way of working is setting up and running a limited company, as a series of advantages will be made apparent. However, when making your decision, a contractor must consider three main points. Their IR35 status, their presentation or status and then the administrational aspects. If the contracts under work fall outside of IR35, then from a tax perspective, the limited company would be the best option, especially for those contracting long term. Furthermore, if you fancy being a director then a limited company will be your best option. However, the biggest decision factor is to do with administration, as a limited company requires more of your time outwith the job itself. This takes roughly half an hour a week to perform administration duties. If you are object completely to paperwork of any sort, then an Umbrella formation will be your most fulfilling option.
By making an informed decision from your personal circumstances and the requirements you need, you can achieve a highly efficient result; as there is no option that is always right or always wrong. Either method will work under most circumstances, with both results being similar, except for certain different arrangements for working.
Advantages of a Limited Company
First off, you are the director of your own company and this provides the most tax efficient way of working, from the two options. Running a limited company will allow claiming for a wider array of expenses while giving access to the flat rate VAT scheme. Alongside these benefits, you get to keep 100% of the control of your financial affairs. You don’t have to risk any of your money with any third party administrator either, while a limited company also gives you great tax planning opportunities, ideal for those contractors with complex financial aspects. A wider array of tax benefits are available, this includes dividend payments, which attracts a lower rate of tax.
Running your own business doesn’t need to be difficult, submitting your spreadsheets, time sheets and expenses to your accountant is as complicated as it gets. Finally, you are you own boss; you’ll have complete control over the company and its operations.
Advantages of an Umbrella
An umbrella is perfect for first time contractors, requiring a quick and easy contracting start-up. Its straightforward and easy to use, simply updating a timesheet alongside expense details in order to get paid. An umbrella is ideal for short-term contracts or contracts less than £25,000 per year.
Legal implications and responsibilities of running a limited company are removed, while the pay-as-you-earn (PAYE) umbrella takes care of all the accountancy, taxation and administration and communication aspects around invoice payment. National Insurance and tax are deducted before you receive the wage, no further taxes are therefore payable. More than often, insurance policies are included as a part of the service. You will have employee status with entitlement to all the statutory employment rights. An umbrella is perfect for those unsure about whether to stay in the contracting market.
Disadvantages
A limited company can be costly if contracting for a short period of time, or if the contract is under £25,000 per year. For a limited company, there is a certain amount of paperwork involved, while as a director of your own company you will be required to keep Companies House informed of every single one of your companies dealings.
If you select an umbrella, you are reliant on the umbrella company to collect your money for you from the end client and pass your entitled amount over to you in full. You will also receive a salary that is subject to full pay-as-you-earn (PAYE) tax and NI (National Insurance). With these deductions, it will feel like being treated as a permanent member of staff.
For more information on Contractor Accountants or Limited Company V Umbrella visit the Euro Accountancy & Finance Services website.
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