Umbrella or Limited Company?

Limited Company or Umbrella PAYE Earnings – A Comparison

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Umbrella Company or Limited Company or agency PAYE?

Following the introduction of the IR35 legislation, there are now only three real options open to contractors; Umbrella or Limited Company or agency PAYE so let’s have a look at each option in more detail.

Simply complete the ‘Quick Quote’ form opposite to receive a ‘no-obligation’ income illustration which compares your potential earnings through a Limited Company compared to standard PAYE. Take 2 minutes now and see how much better off you’d be through a Limited Company.

The options available to contractors are as follows:

Option 1 – Umbrella Company (Payroll service)

An umbrella company is essentially an invoicing vehicle for contractors who want to avoid the administration duties normally associated with contracting, namely issuing invoices, chasing payments from clients / agencies, calculating tax and national insurance (NI) contributions and making payments to their bank account. It’s worth noting that because you are employed by the umbrella company, IR35 legislation does not apply.

Contractors who work through an umbrella service will submit timesheets and expenses (normally online) and then leave the rest up to the umbrella company. They will generate and send an invoice to the agency or client, chase payment when it’s due and then upon receipt of payment will calculate your tax and N.I and transfer your net pay direct to your bank account.

Naturally, there is a fee for providing an umbrella service which can vary hugely between different companies. For new contractors deciding on whether to use an umbrella or limited company, the umbrella company is often an appealing option, as it provides an easy and cheap way to decide if contracting is for you.

Click the image to view our infographic in full.

Many contractors, especially those who are contracting long term or want the best possible return normally decide to start their own limited company, which we will move onto now.

Option 2 – Limited Company (or Personal Service Company)

The vast majority of contractors who have looked into using an umbrella or limited company end up working through their own limited company, as this is the most tax efficient method, enabling them to keep more of their income. However, these tax advantages are wholly dependant on whether they fall inside or outside IR35 “rules”.

By setting up a limited company you have complete control of the running of your company and its bank account. Provided your contract falls outside IR35 (i.e. you’re not deemed to be an employee of the client using a limited company as a disguise) you may draw dividends from the company that are not subject to National Insurance (NI) contributions.

When comparing the Umbrella or Limited company option, many contractors decide against starting a limited company because of the day to day administration and the legal requirements all limited companies have to comply with. However, with our Freestyle Contractor’ limited company accountancy service, the administration burden of setting up and running a limited business is completely removed. Everything from company formation and the setting up of your bank account through to invoicing your clients, monthly payroll, annual account preparation and corporation tax returns are all included in the service.

You simply enter your expenses and invoices online and Freestyle Accounting will handle everything else and provide you with an up to date live position of your company’s financial situation.

The Freestyle service includes:Umbrella or Limited Company

  • Formation of your limited company
  • Registering your company for VAT/PAYE
  • Setting up your company bank account.
  • FREE IR35 status reviews at any time.
  • Acting as your registered office including full company secretarial service
  • An intuitive online system to enter timesheets and expenses
  • Generating and sending invoices to clients
  • Completing quarterly VAT returns.
  • Up to date live position of the company, showing profit to date, what you need to reserve for tax and what is available as dividends. All available through our online system.
  • Monthly payroll service including all year end submissions.
  • Annual Statutory Accounts including filing all statutory returns inc Corporation Tax Returns.
  • Personal Tax Return
  • Dealing with all correspondence from HMRC & Companies House
  • Advice on IR35 & S.660
  • Comprehensive Insurance package including PII, HMRC investigation insurance.

Many competitor companies will claim that their service is comprehensive, but on further investigation you will find that there are a number of hidden charges and exclusions.

The contractor limited company service is positioned at the premium end of the market, providing a truly end to end solution for contractors wanting to reap the tax benefits of a limited company without the hassle and administration burden.

For more detailed information on setting up your Limited Company then please read our contracting through a contractor limited company guide.

Option 3 – PAYE through an agency

The last and generally the least favourable option for contractors is the agency PAYE route. In short, you are employed by the agency so you pay full tax and national insurance contributions and you are either tied to working through that agency indefinitely or having to resign and join a new payroll scheme each time you change agency.

If you require any more information on whether an Umbrella or Limited Company would be the right option for you or if you would like a free ‘no obligation’ illustration of your possible income using these different options, please call one of our dedicated Advisors at Freestyle Contractor Accountants on 0800 954 2101 or email tax@freestyleaccounting.com