Following on from our recent blogs on the choice you have as an IT Contractor between using an umbrella company and setting up a limited company, here are some pros and cons of each business structure to help you decide which is right for you.
Setting up as an IT Contractor
For a limited company, it only takes a couple of hours to register with Companies House. Registering for taxes, (Corporation Tax and VAT number) could take a few weeks.
Setting up with an umbrella company is usually instantaneous.
As an IT contractor using an umbrella company you will pay them a fee; this is paid weekly or monthly and taken care of by the umbrella company along with your tax and NI contributions.
With a limited company, you pay an accountant to manage your company’s tax affairs.
The fixed rates for an umbrella company and contractor accountant are often similar.
Accounting and insurance obligations
IT contractors with a limited company need to compile regular accounts and complete annual accounts to Companies House. You also need to submit a Corporation Tax Return (CT00) every year and settle any tax liabilities, including your annual tax return. Your limited company also needs to pay for business insurances, such as professional indemnity insurance.
There is little to no admin if you work under an umbrella company. You do not need to complete a tax return, unless you earn additional income outside of the umbrella company. The fee you pay your umbrella company will usually cover your insurance.
With a limited company, you can take dividends when you need to. This is a flexible way to draw money from your business. You must pay your taxes at the correct rate and on time.
Under an umbrella company, there are very few tax planning opportunities. The umbrella company deducts taxes and collects VAT before you are paid by them.
Result: you get more flexibility in your tax planning as a limited company
A limited company is more tax efficient than working for an umbrella company. Under an umbrella company, your entire salary is taxed via PAYE.
There are online calculators to help you work out what you could earn as an IT contractor using both models.
If you do not pass the IR35 compliance test, most of the tax benefits of working as a limited company are lost. However, the IR35 is not relevant under an umbrella company.
Getting paid and expenses
If you run a limited company, you must invoice the agency. You can offset your expenses against the company’s tax bill. You must also set up a separate business bank account.
With an umbrella company, you must submit a timesheet and the umbrella company then invoices the agency. There is little scope to reclaim expenses under an umbrella company. Additionally, you do not need to open a separate bank account.
An umbrella company is a solid choice if you are new to IT contracting and want to test the water with one client. Additionally if you are on a lower daily rate there may be very little difference in tax efficiency.
If you intend to work with multiple clients and are willing to pay a contractor accountant to manage your business, then you may want to work as a limited company. This will give you a high degree of control over your business and pay less tax, but you also have a lot more administrative tasks.
We hope this has helped answer your questions. Further information on being an IT Contractor can be found here.
Please give us a call if you are looking for work as an IT contractor or you are a company looking for IT contract staff, 0844 879 4523