The first task for any contractor is to decide upon the best business structure to work under, either limited company or umbrella company.
Contracting under your own limited company means that you will oversee your accounts, your salary and your taxes. You will need to establish your limited company and open a bank account. As the limited company director, you will control invoicing, the company bank account and you will decide on your own salary. You will have several statutory and financial obligations, such as submitting annual accounts to Companies House and meeting your HMRC tax deadlines.
One of the main benefits of contracting via a limited company is tax efficiency. Unlike a permanent or umbrella employee, your pay yourself in the form of a basic salary (usually low) and the remainder is drawn down in the form of dividends. Dividends are not subject to NI contributions, which results in tax saving, although the extend of this benefit was reduced significantly in April 2016 following an overhaul of dividend tax rates.
Umbrella company (PAYE)
Working under an umbrella company, on the other hand, means that your salary and taxes will the responsibility of your umbrella company who will act as your employer. The client pays the scheme when you have submitted your timesheet to your umbrella company, who will then pay you a salary with NI and tax already deducted, as well the umbrella fee and any other pre-agreed costs.
It is not as tax efficient as the limited company structure, however it does provide contractors with an easy route to contract, and often, appeals to those who are ‘testing the water’, short-term contractors and those who prefer little admin.
There are pros and cons of using either of these structures, our consultants can provide guidance on the different routes and help you to make an informed decision based on your specific circumstances.
The information above provides an overview and is in no way comprehensive. We recommend contractors obtain more information before making their final decision – we have provided some useful resources to help:
Limited company guides and information for contractors
Umbrella company guides and information for contractors