Umbrella Company vs. Limited Company

When you start contracting, you have to make many important decisions. You have to do something about payment processing. You will also have to decide if you want to let umbrella company act as your employer and handle everything or you want to take all the burden yourself by opening a limited company.

You will easily decide your route with the help of following tips and points.

Start-up

When you have a short-term contract, but you are not sure if you will continue working as a contractor, the wise option will be joining an umbrella company. With Umbrella Company as your employer, you do not have to worry about instigations and termination of the job. It works like a regular job. On the other hand, setting up a limited company means start-up and closing costs for contractor as well as accountant.

Receiving payments

When you setup a company, you have to open a bank account with company name to receive payments. This can take weeks. On the other hand, Umbrella Company will send payments directly to your bank account.

MSC Legislation

MSC (Managed Service Company) legislation limits the work that an accountant can do on behalf of a contractor. This will result in extra responsibilities to the contractors. Issuing and managing invoices, collecting funds and submitting self-assessment to HMRC are just a few to name.

When you work with an umbrella company, you don’t have to do any of this as you do not fall under the MSC legislation.

IR35

When you are working through your own limited company, IR35 legislation can create problems for you. If you try to work outside IR35 using ‘disguised employee’, you will have problems as soon as HMRC starts its investigation. You will also have problems choosing an accountant since standard firms will lack the information and experience of problems of contracting world. Alternatively, an umbrella company removes this burden by acting as your employer. IR35 rules do not apply to such contractors.

Tax Payments

HMRC will hold you responsible for any defaults with tax payments and errors in respect to that, when you operate through your own limited company. Depending on the mode of payments set, you will have to bear two kinds of tax payments

-          PAYE income tax: You have to clear your PAYE income tax by 19^th of each month following your working-month.

-          Corporation Tax: You will have 18 months to pay your corporation tax after your company begins trading. You will require discipline throughout this period to easily pay the money by the end of payment period.

When you join an umbrella company instead of creating a private company, you won’t have to worry about these tax payments. Umbrella Company will deduct NI and other necessary taxes before processing any payments. Umbrella Company will file it with HMRC in due time.

VAT

You will have to register your limited company for VAT in case your annual income exceeds £67,000. VAT payments are quarterly, meaning you will have to stay disciplined and be prepared with the money every 3 months. On the other hand, an Umbrella Company will take care of VAT leaving you free from such administrative and tax responsibilities.

Concluding the discussion, you can start a limited company if you can take on the responsibility and have enough time to dedicate to all the complicated issues. Joining an umbrella company will eliminate all these problems.