New to Contracting? – Ltd. vs Umbrella

You’ve made the decision to start contracting and have secured your first assignment, what options are available to you now? The more traditional choices would have you asking, “do I set up my own limited company or join an Umbrella Company?”. With no experience in the contracting world, this can be a difficult decision. In this article we will explain the differences between the two options, to assist you in making the right choice.

Entering the world of contracting can be exciting and rewarding. The ability to choose assignments and create a work-life balance while embarking on diverse opportunities is an attractive prospect to most. Though choosing to become employed by an umbrella company may not be the most tax-efficient option, it is the most stress-free route. If you’re happy to take home a small percentage less for a heightened level of convenience then this may be the path for you. An umbrella will take care of invoicing and will process your Income Tax and National Insurance payments, guaranteeing you peace of mind. Using this service, you will be classed as an employee of the umbrella company and will receive the same entitlements of a permanent employee, including sick, maternity, paternity and holiday pay. It will still allow you the independence to choose your working hours and assignments.

At Swan Health Contracts, we guarantee fast and efficient same day payment processing, the freedom to move between contracts, agencies and clients and you’ll have access to our professional, friendly customer service team who are available to offer information and advice when you need it. We also ensure that you are kept up to date with all the legislation and employment and tax law, so you can concentrate on the job at hand.
The second option is to set up a limited company, this allows you to have more control over your finances and is a more tax-efficient way of working. As a director of the company you choose your salary and the remaining funds can be drawn as dividends, (currently taxed at a lower rate). As a limited company, you will have responsibility for all your administration work, filing and payment deadlines. You will also be required to complete your annual tax return to HMRC. If you opt to set up a limited company, it is advisable to seek the support and advice of a specialist contractor accountant to ensure you are fully compliant. (We have trusted business affiliation with Ezyco Accounts should you require any accountancy advice).
Before making a final decision it’s always advisable to look to the future rather than focus on the present. In April 2021 HMRC is introducing IR35 status for the private sector, meaning your end client will be liable and responsible for deciding whether the role could be carried out by a regular employee of the company. If this is the case, it will not be possible to fulfil your duties under your limited company. If you operate inside IR35 you will be taxed as an employee and subject to PAYE and National Insurance; if your contracts will consistently fall within IR35, the best option is to operate under an umbrella company.  

To remove the ambiguity choosing an umbrella company may be the smarter move. Due to the fully employed status, you’re instantly removed from the scrutiny of IR35. You also have the reassurance that your funds are handled safely and securely your behalf.

Pros of using an umbrella company:
• No company set-up costs – sign your contract and you’re ready to go.
• Ideal for short term contracts.
• Full employee rights.
• No responsibility for accounts and tax returns.
• Salary is paid directly to you, with fees and tax deducted.
• Negotiation of contracts is between the umbrella and the recruitment agency or end client.
• Fully covered by employers’ insurance coverage.
• Maintain a flexible approach to your work.

Minor disadvantages of using an umbrella company:
• Your money paid to you as an employee salary, meaning you have less control of your taxes.

Advantages of a limited company:
• More control over your earnings.
• Slightly more Tax-efficient due to dividend provision.
• If successful, it is an entity that can be passed on to future generations or for a profit. 

Disadvantages:
• You are responsible for accountancy.
• Full administrative responsibilities including invoicing.
• Annual filing to HMRC and Companies House.
• Many contracts will end up falling outside IR35 post-April 2021 – This would be out of your control.

Are you still unsure about the best route to take? Our friendly customer service team are available to offer support and information.