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.
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.
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.
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.