‘Avoid’ Tax Avoidance Schemes through Umbrella Companies!
Many Umbrella companies are straying into the area of
tax avoidance . You can spot them as they promise returns of 90% and more and somewhere on the website (if you look hard enough) you find mention of a leading Tax Counsel or Tax QC. These are not the traditional employee Umbrella scheme that you think they are, if they mention Tax Counsel, or Counsel’s opinion, they’re an Avoidance Scheme, so BEWARE!
Read more to find out why this is becoming such a big issue →
Administration & Paperwork
As a Director of your own Limited Company, you are responsible for all of your own paperwork including invoicing, expenses, bookkeeping and ensuring that your accounts are in order. If, however, you subscribe to an ‘all-inclusive’ service through a good quality accountant, a lot of this paperwork will be managed for you.
Contracting through an Umbrella Company is ideal for those who don’t want the hassle of dealing with any paperwork. You simply submit your timesheet and expenses to the Umbrella Company and they will do the rest for you – invoicing, chasing payment and calculating tax and national insurance (NI) contributions.
With Limited Company contracting, as a Company Director, you are responsible for invoicing your client and managing the Company bank account. The client will pay your Company direct and you can then pay yourself.
If you are contracting through an Umbrella Company, the Company will invoice the client on your behalf. The Client will pay the Umbrella Company and the Umbrella Company in turn pays you.
If the Umbrella Company ceases to operate, however, you won’t get paid! Likewise, if there’s a delay in the Umbrella Company getting paid, then you too will have to wait for your money.
Is a Limited Company right for me?
Contracting through a Limited Company is most suitable if you earn more than £15 per hour, plan to be contracting for more than 6 months and are happy to manage the Company administration.
Is an Umbrella Company right for me?
Umbrella Companies, however, are more suited to those Contractors who will be earning £15 per hour or less, are on shorter term contracts (generally less than 6 months) and don’t want to manage any of the paperwork. Don't forget though, from 6 April 2016 , you will no longer be able to claim travel and subsistence expenses through an umbrella company.
Umbrella Company vs Limited Company – The Conclusion!
So, which trading structure should I choose? Limited or Umbrella Company?
This brings us back to the point about the answer being found in your motivation to become a Contractor in the first place. The vast majority of Contractors leave employment and join the world of contracting in order to increase their net income; contracting rather than employment gives the opportunity for greater earning potential for the same number of hours worked, but also potentially the ability to keep more of what you earn.
Therefore, providing you employ the services of a good accountant offering an all-inclusive accountancy package to minimise your administrative duties, running your own limited Company is the most favourable trading structure for most Contractors due to the higher potential take home pay of between 75-90% of your earnings.
The exceptions are those Contractors who are only intending to contract for a short period of time, those earning less than £25k per annum, those for whom the majority of their contracts will fall inside IR35, and to an extent those who are new to contracting and still not entirely sure whether or not contracting is really going to be for them in the long term.
The Umbrella services Company is sometimes chosen by Contractors who want to avoid the administrative responsibilities associated with running your own limited Company. However, the truth of the matter is that there are now many good accountancy firms offering affordable all-inclusive packages, where they will take care of all but the most minimal of administrative duties for you when running your own limited Company. Good “all inclusive” packages include the use of an online system that you, the Contractor, can use to further simplify what’s required of you.
However, if you only intend to contract for a short period of time (i.e. 3 months or less) then the Umbrella option would definitely suit you well because of the administration and cost involved in opening and closing a Company. It is also worth noting that many Umbrella companies insist on either a minimum level of charging or a minimum time for which you must pay for their services, so be sure to check this when making your choice of provider.
In addition, accountancy fees for running a limited Company compare favourably with Umbrella Company service charges, making the avoidance of administration a less credible argument for the Umbrella route over setting up your own limited Company.
At a Glance Summary - Umbrella Company vs Limited Company
Take a look at the infographic provided below to discover which trading structure is most suitable for you. We have also included income illustrations for Contractors with daily rates of £300 and £500 per day operating through their own limited Company versus using the services of an Umbrella Company. If money is your motivator then the figures speak for themselves.
Let us prepare an individually tailored income illustration for you. Simply complete the enquiry form above and we will provide you with an illustration comparing your take home pay for both trading options!