So you’ve decided to become a contractor, now one of the first things you need to do is to determine whether you want to operate through an Umbrella Company or set up your own Limited Company.
The majority of contractors have historically worked through their own Limited Companies, as becoming a director and shareholder was the most tax efficient way of working and has a number of advantages.
These advantages include claiming back a wider range of expenses, including accountancy fees, equipment and software costs. You can also access the flat rate scheme; a VAT scheme which allows you keep some of the VAT you receive. Most importantly for some contractors, you have complete control over your financial affairs.
For those who feel the benefits of having their own Limited Company do not outweigh the administrative duties normally associated with contracting in this form, an Umbrella Company is there to do all of this for you. Umbrella Companies will normally issue invoices on behalf of the contractor, collect payments from clients, calculate N.I contributions and tax, and then pay the contractor their net pay direct to their personal bank account.
Umbrella Companies were traditionally more expensive than setting up your own Limited Company, primarily because they tended not to offer the same tax advantages, and their charges included all the administration overheads. However the tax disadvantages of operating under an Umbrella Company have been reduced with the introduction of IR35 and new internet based umbrella companies have materialised.
If neither an Umbrella Company nor a Limited Company appeal to you, then some agencies do allow you to become “PAYE” through their own payroll service. However this is the least tax beneficial choice available to contractors as you are required to pay full tax and NI contributions on all your earnings. You will also be unable to claim valid business expenses using this option, which would help lessen your tax and NI liabilities.
And if you’re still undecided then there are masses of free guides you are able to access on operating under an Umbrella Company or setting up your own Limited Company to help you make the right choice!