As a contractor, it’s likely that you’ll have two options regarding the structure of your contracts. While joining an umbrella company is undoubtedly a growing phenomenon, the concept of launching a Limited Company is the one you’ve almost certainly considered.
But is this the right option for the future of your contracting endeavours? Let’s find out.
The Advantages Of Starting A Limited Company
Starting a Limited Company essentially means registering yourself as a business at Companies House. By taking this route, you can reap all of the following rewards;
- Launching a Limited Company is the most tax-efficient way of working as you can pay yourself a small salary and take the rest through dividends, which are exempt from NICs.
- Starting a limited company can be done for next to nothing, especially with online incorporations.
- Those caught by the IR35 rulings may benefit from the flat rate VAT scheme or the 5% expenses allocation.
- Having a company puts you in full control of all financial matters while also opening the door for future growth, including the idea of taking on employees.
- Personal liability is restricted when you are a company director.
- Simply boasting a company can present a more professional brand image to business clients compared to working as ‘just you’.
- You can decide when to draw money from the company and can even pass shares to family members for added tax benefits.
While operating in this manner isn’t free from potential issues, there is no doubt that the benefits do make it an attractive prospect for many contractors and prospective contractors looking to take the next step.
The Disadvantage Of Starting A Limited Company
The umbrella company scheme wouldn’t exist if there weren’t a demand for it, and it is an alternative that deserves consideration as you’ll avoid the negative aspects facing company directors. Some of those problems include;
- The Limited Company route is designed for those looking at long-term contracting. If your future isn’t stable, the alternative options may be better.
- Running a Limited Company comes with more significant responsibilities and administrative obligations. Even if you’re planning to use an accountant, the umbrella company route is easier in this sense.
- You will be required to file yearly records and complete a Confirmation Statement for HMRC.
- When working through an intermediary, it can cause complications as you comply with the IR35 legislation.
- Hidden fees can creep in, which is a contrast to the very clear umbrella company route.
The disadvantages are well worth remembering as some contractors will find that they outweigh the positives. Still, if it’s all about the financial outcome, the Limited Company is attractive – especially if you find a way to prevent it from consuming your time.
Which Is The Right Option For You?
There is no one right option for everyone, and it’s ultimately down to you to weigh up the pros and cons before opting for or against the Limited Company option. Whichever outcome you reach, it will give you the strongest platform as you embark on this new business venture.
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Moving into the world of contracting can be an immensely exciting time for a modern worker, not least because an increasing percentage of business-to-business activities are now handled through this route rather than traditional employment. If you’re going to make this transition, however, it’s imperative that you find a structural setup that works for you. One of the toughest challenges is deciding whether to launch a Limited Company or join an umbrella company instead.
A little research goes a long way, especially when making one of the most crucial decisions of your entire career. Here’s all you need to know.
Two Ways To Handle Your Contracts
As a contracted worker, your first job is to gain a little insight into the two ways contracts can be handled:
Direct Contact: This exists directly between the client company and your limited company or umbrella company.
Indirect Contract: This exists when a recruitment agency serves as an intermediary. So, one contract is made between the client company and the recruitment agency while another is created between the recruitment agency and your limited company or umbrella company. There is no direct contract between you and the client.
Either way, there is no one definitive answer as to which option you should take, which is why you need to learn a little more about both options.
The Limited Company Route
Joining the country’s 1.8 million actively trading companies will see you take on a host of responsibilities. After all, you’ll need to file the company’s taxes while also adhering to HMRC’s tax deadlines. As a contractor yourself, you probably won’t need to worry about the duties of taking on employees – at least not yet. More importantly, there are many benefits to be had from this option.
Operating as a Limited Company is commonly the most efficient option from a tax viewpoint. You pay yourself a small salary and take the remainder in the form of dividends, which are exempt from National Insurance Contributions. Being the company director additionally gives you immense flexibility over when to withdraw funds from the business.
Starting a Limited Company can be accomplished for just a one-off fee of a few pounds, although many choose to use an accountant as this will take care of other related tasks.
The Umbrella Company Route
Umbrella companies have become hugely popular in recent times. The basic premise is that you become an ‘employee’ of the company, although you’ll continue to complete your contracted tasks as usual. The only significant difference is that they will handle your salary payments, which also means that they can take care of income tax, NICs, and pension plans before paying you.
Essentially, like a traditional employee, the money you receive is yours. The umbrella company makes using timesheets very easy too while the best ones offer very quick payments too. While the service does come at a small fee, it does save the hassle and outlay of setting up a company. Moreover, you won’t fall victim to filing your taxes incorrectly.
Depending on your situation, you may have very strong feelings on whether to start a business or use an umbrella company. As long as you do what works best for you, your future as a contractor will look brighter than you ever thought possible.