Contractors primarily have two well-established payment structures to choose from: operating under an umbrella company or setting up a limited company. For newcomers, it’s a tough choice, as each option offers its own benefits and drawbacks.
A limited company route typically provides more tax benefits and limited liability for shareholders. This makes it an attractive option for those intending to contract for the long haul. However, being a limited company contractor entails dealing with a lot of paperwork, tasks such as tracking payments and determining tax dues.
When working through an umbrella company, contractors are extricated from these administrative challenges. The umbrella company becomes your direct employer and oversees your administrative responsibilities, ensuring correct tax payments. However, the umbrella company contractors don’t reap the extra tax benefits that are available to limited company contractors.
While it’s vital to weigh the pros and cons of each option, there are several other considerations to bear in mind such as:
Attitude towards paperwork: The task of setting up and running a limited company involves significant paperwork, including filing accounts, calculating taxes, invoicing, among other tasks. If you don’t mind these efforts, the limited company would be your go-to. But if paperwork isn’t your forte, an umbrella company could be a better fit. Remember, you can also consider appointing an accountancy services provider to assist, allowing you to enjoy the benefits of a limited company while experts handle the paperwork.
Contract duration: For short-term contracts, the overhead of establishing and dissolving a limited company might not be cost-effective, making umbrella companies a more viable option. On the contrary, if you’re targeting long-term contracts, setting up a personal services company could be beneficial.
IR35 laws: Your decision could also be influenced by whether your contracts fall inside or outside IR35 regulations. To avail tax benefits under the limited company option, your contracts should ideally fall outside the legislation. In such a case, a limited company could be more financially sensible.
Control: If having complete control over your affairs is essential to you, then a limited company would be a better fit for you.
So, if after considering these points you’re still indecisive, it might be wise to start with an umbrella company, transitioning later to a limited company if necessary. The choice between these two options isn’t an easy one, so extensive research and professional advice are necessary to make an informed decision.
