Limited company vs. umbrella company: Which is right for you?

Traditionally, contractors in the UK have always worked through a limited company because of the many tax advantages. But since the introduction of IR35, many of those advantages no longer apply to those who fall within the IR35 rules.

So which option is better for you? The truth is, one is no better than the other, and there are advantages and disadvantages to both options. It really depends on your personal circumstances, including how much admin you can handle, whether or not you see your company growing and employing others, and whether or not you might go back to permanent employment at some stage.

Setting up and running a limited company is a big responsibility, but is also a relatively risk-free option with many tax benefits. Working through an umbrella company is probably the easiest option for contractors and freelancers – especially first-timers and those who do not want to deal with too much paperwork and responsibility

Take the quiz below to help you decide what’s best for your personal circumstances. Simply choose the answer that seems MOST true for you.

1. I want the highest take home pay possible, even if it means I have more administrative and legal responsibilities.

True = 3

Not true = 1

2. I want to be the director of my own company.

True = 3

Not true = 1

3. I’d prefer to leave the admin to someone else and concentrate on doing the work.

True = 1

Not true = 3

4. I don’t mind handling all the daily tax chores, including invoicing, filing returns and liaising with accountant.

True = 3

Not true = 1

5. I’d like to be able to claim back on a wide range of expenses, including the equipment needed to run my business.

True = 3

Not true = 1

6. I am extremely responsible and will take care of all my legal compliance and corporation tax issues.

True = 3

Not true = 1

7. I am up-to-date on the legal compliance and tax issues that would affect my company.

True = 3

Not true = 1

8. I don’t really want to have anything to do with “corporation tax” and other “corporate governance” issues.

True = 1

Not true = 3

9. I don’t want to be personally liable, should my company ever be declared insolvent.

True = 3

Not true = 1

10. I might employ other people at some stage.

True = 3

Not true = 1

11. I’d like to be able to switch back to permanent employment whenever I want to.

True = 1

Not true = 3

12. I’d like to be paid monthly, as if I was a permanent employee.

True = 1

Not true = 3

13. I’d like to be able to claim benefits like sick pay.

True = 1

Not true = 3

14. I’d like to pay myself a salary from my company and decide when to draw dividends.

True = 3

Not true = 1

15. I will probably never have employees.

True = 1

Not true = 3

Now add up your score and read the results:

15 – 24 Points

You just want to get on with your work and receive your money with minimum hassle.

You are probably more suited to working under an umbrella company. This means the umbrella company issues invoices on your behalf and processes payments from your clients or agency, making all the necessary calculations and deductions before making payment to you. While there is some admin involved (like submitting your timesheets), this is the more hassle-free option. You enjoy the best of both worlds – the freedom of a contractor lifestyle; with all the benefits of fulltime employment, including substantial tax savings. At1st Contact Umbrella, you also get access to additional benefits like sick pay. You can switch back to permanent employment any time without any hassle or loss.

And once you sign up to an umbrella payroll company like 1st Contact Umbrella, you simply log your timesheets every week or month as agreed, and let us handle the rest.

25 – 31 Points

You probably need to do a bit more research to be absolutely sure.

Why not speak to a consultant who will be able to ascertain exactly what your personal needs are? Call 0808 141 3333 to speak to a professional and experienced 1st Contact Accounting consultant. They can help you get started with your freelance career.

32 – 45 Points

Dreaming about the empire you’re going to create?

You are probably best-suited to setting up and running your own limited company of which you are the director. This choice comes with more responsibility, but is a relatively risk-free option with many benefits, including the highest take-home pay.

You are in control of all company decisions and transactions and your personal assets are not at risk should the limited company be declared insolvent. You can claim back on a wide range of expenses, including accountancy fees and services and equipment needed by you to run your business. You have access to the flat rate VAT scheme, which allows you to keep some of the VAT you receive from your clients.

You decide what salary to pay yourself and when to draw dividends. And, should your business grow quickly, you could easily hire other people to work for you.

If this sounds like the way forward, visit Sable International Accounting to see how we can help you set up a limited company in one day.