This article is designed to provide contractors with an informed, non biased overview on the merits of umbrella company and limited company solutions for contractor payroll management and accounting. The article should be read in full, with the summary of comparative pros and cons of each accounting solutions being particularly useful for first time contractors and those new to umbrella companies. If you are unsure of any aspect of the information below, please give us a call on 0845 634 2552. We can discuss options and assist with registration once you decide which accounting solution is right for you.
There are differences between running your own limited company and using the services of an umbrella company. At Contractors Umbrella Company we ensure that you get the right service that suits your needs. Every contractor has different requirements; we have grown and tailored our umbrella and limited company accounting solutions to ensure that each and every contractor has the tools for simple, professional accounting and control, with fast payments. No waiting for cheques or delays with cash transfers, our systems are cutting edge, it's your money and we ensure that you get it quickly, with the maximum tax deductions applied, ensuring legal compliance.
Like most contractors, you are probably wondering: "Will I be better off having my own limited company rather than using an umbrella company?"
We have provided a simple comparative table below but the major financial differences between your two options are National Insurance Contributions (NIC) and Value Added Tax (VAT).
PAYE Calculator updated for 2020, free salary illustration for Contractors Umbrella Company in comparison to traditional PAYE employee
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New to Umbrella Companies? Read through our selection of questions that Contractors regulalrly ask us about how umbrella companies work and how you will be paid
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As professional payroll accountants we provide the right option to suit you. We provide advice and guidance on the right payroll solution for your contracting career
Umbrella Company NIC's payments include both Employees NIC and Employers NIC.
Employees NIC starts at 11% and Employers NIC is 13.8%. Both these charges will come out of your gross income, after your tax free personal allowance has been taken into account.
If you use the service of an umbrella company and you are earning, say, £300 a day you will have to pay approximately £250 a week in NIC. With the same daily rate, but trading through your own limited company, you will only pay £30. Using this example, your NIC savings will amount to £10,000 in a normal year where you work 46 weeks.
With a Limited Company, the higher your daily contract rate the more you will save in NIC payments.
An umbrella company is ideal for 'short-term' or 'one off' contracts and for those who are happy to pay a little bit more tax in return for no paperwork at all. An umbrella company is the simplest and most straightforward way to handle contract administration and paperwork.
A limited company is the best option for those contractors who have longer term assignments and for those who want to reduce their tax bill and maximize their net take home pay. Most long term contractors use our limited company solution.
The government incentivise small businesses and simplify their own administration by allowing limited companies to operate a Flat Rate VAT scheme.
Your limited company will issue invoices that charge VAT at 20% of the gross invoice amount, but you only have to pay back to HMRC 13.5% VAT in your first year of trading. The VAT rises to 14.5% after that, but it is still substantially less than the VAT you charge to your recruitment agency.
On a daily rate of £300 you'll earn at least an extra £3,000 a year.
Running your own limited company has other benefits. You'll earn interest on the money that is in your company bank account and there is a wider range of business expenses you can claim.
If you're earning £300 a day you could be taking home an extra £10,000 a year. Even though the taxes (income tax/corporation tax) for the limited company and umbrella company option,will be roughly the same the limited company contractor will reap additional benefits in the form of VAT and NIC.
From our years of experience working with contractors across most sectors and markets of the UK, we suggest:
|PAYE Umbrella Company Register Now||Limited Company Register Now|
|Receiving Payment||We receive payment, deduct tax then pay the remainder to your account.||Funds are received into your business account. You then decide (with our advice) how much to pay yourself and how much to save for tax.|
|Saving for tax||All tax and NI is deducted before you receive your money, so you will have no further taxes to pay.|
|How much tax will you pay?||Around 40% of your income will be paid as Tax. This reduces as more expenses are claimed to as low as 10% in certain cases.||Around 20% of your income will be paid as tax. This will reduce if more expenses are claimed, as low as 0% in some cases.|
|Running costs||£27.50 per week. Approx £13-£15 after tax.||£21.92 per week (paid as £95 per month). Approx £17.50 after tax.|
|Expenses||Claim contract related expenses. Post receipts to Umbrella Company.|
|Short or long term||Easier for individuals who do not see themselves contracting for long(less than 12 months) or dont want additional commitments of ltd company.||Optimum solution for longer term contractors.|
|Starting||No costs. 1 hour set up.||No costs. Company formed in 24 hrs.|
|Insurance||Insurance is included.||We can help arrange specific insurance for your company.|
|Status||Your are an Employee of the Umbrella Company.||Your are a Director of your own Company.|
|Support||Full telephone and email support plus online account management.||Full telephone and email support plus online account management, iPhone and Android mobile apps.|
Running your own limited company or using the services of an umbrella company are both great ways to trade as a contractor. Each method has been specifically designed by us to fit around the needs of today's busy contractor.
But nothing in life is perfect - we're open & honest with our clients and always work transparently with our contractors who know exactly what we are doing for them. Each method of trading has advantages and disadvantages which we make clear from the outset of our professional relationship.