So you have secured a contract for yourself and the big question that is asked by almost every new entry to the market is whether they should trade as a limited company or use the services of an umbrella company. The decision will have a huge impact on your personal tax bill so it is important to get it right.
Firstly, let me explain to those of you who are unsure of what an umbrella company is. It is essentially a payroll facility. The structure will be that of a limited company but could have as few as 1 or as many as 10,000 individuals working through it. If you chose to use an umbrella company, you’d become an employee of the umbrella company for the duration of your contract and will be paid as an employee with full tax and national insurance being deducted before you are paid your net salary.
Of course, if you operate through your own limited company, your business will ‘own’ your contract and get paid for the time you work and then it is up to you to pay yourself from your business with the support of a good accountant (hello!) to guide you through the process. But it will just be you that works through your company.
So how do you know which route to choose and what are the benefits of each? Let’s start with a few pros and cons for you to consider:
So as you can see there are a few things to consider. Our experience is that in helping you decide which way to go, there are a few important questions to consider. The critical factors to take into account in coming to a decision are as follows:
Lastly, when assessing the ‘Limited v Umbrella’ option, it is important for us to give you a feel of what the two different avenues could mean to you in terms of taxes and take-home pay. So, let’s set out some parameters and then illustrate the differences in those numbers.
Those parameters (evaluated over the course of a 48-week working year):
So working through an umbrella company, the equation is really simple: Your income would be £108,000 (£450 / day for 5 days a week for 48 weeks a year) meaning your taxes deducted would amount to £43,813 with your take home pay being £64,187. Your taxes would be broken down as follows:
Working through a Limited Company, the equation would be different. With your gross contract value being the same (£108,000) and presuming you took every last penny from the business (which may not be tax efficient to do but we’ll stick to that to ensure we are comparing apples with apples), your total taxes deducted (company and personal) would be £28,995 with your take home cash amounting to £78,525. Again, this is broken down as follows:
The £75,579 represents the amount that you could pay yourself as a dividend. Let’s presume that you paid all of this out to yourself, the total personal tax that you would pay on this would be £11,266. So your total take home pay would be made up as follows:
So if you are weighing up your decision purely on tax efficiency, a Limited Company will give you a far better tax home.
For all advice on setting up and managing your limited company, give us a buzz here at The Accounting Crew on 0203 859 6188.
For any advice on running your contract through an umbrella company, please call our sister company, CRUMB. on 01793 261 849
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