One of the most common concerns when it comes to self-employment is which way of working is best for you. Most people are quick to grasp the concept of being a sole trader, but there are two other options that may need a little more explaining. These are working as an employee of an umbrella company, or setting up your own limited company.
If you’re unhappy with your current contracting structure, it is certainly possible to switch between the two, but it’s important to have all the facts before you make a decision.
For a contractor or freelancer, deciding to run your career through a limited company can have a number of benefits. You will be classed as a company director, you can claim a wider range of business expenses against tax, and you can reasonably expect to take home more of your contract earnings.
At present, this is generally between 81 and 86 per cent of the total contract value. However, changes to the way that dividends are taxed mean that this may fall somewhat from April 2016. You can also benefit from limited legal liability if something goes wrong, as you can only be held liable for the amount that you originally invested in
However, in order to get these rewards, you will need to meet a few legal requirements. These include submitting annual accounts to Companies House, meet deadlines imposed by HMRC, and of course, you will be required to run your company responsibly.
If this seems daunting, but you still want to reap the benefits of operating a limited company, you should talk to a specialist contractor accountant, as they will be able to assist with the financial and legal arrangements to make sure you are as well-organised as possible.
On the other hand, the main advantages of working through an umbrella company are ease of doing business and peace of mind.
Umbrella companies are an ideal solution for those who hate paperwork, or are just planning to be self-employed for short periods of time. Because you effectively become an employee of the umbrella company, it is the one that takes care of the administration, and all you need to do is fill in timesheets. You are then paid as a PAYE employee, after the company has subtracted its margin.
While it is very convenient, it is less effective in tax terms than operating as a limited company, unless you would otherwise be subject to IR35 legislation, which cuts the potential benefits of running a limited company.
To summarise, barring a few cases, the choice between limited company and umbrella company is a relatively simple one. Essentially, a limited company is likely to be more lucrative in the long run, but it comes with some extra paperwork to do.
You will probably earn slightly less money if you work through an umbrella company, but the convenience can be invaluable for some busy contractors, or those who have a short contract.
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