Limited vs Umbrella – New to Contracting

So, you’ve secured your first assignment and taken the first step in contracting, what are your options now? The two most common directions are to either set up your own limited company or join an Umbrella Company. For someone who has little or no experience in the contracting world, this is a difficult decision. In this article we will highlight the differences between the two options, to help make it an easier decision for you.

Change breeds apprehension and taking the initial leap into the world of contracting alone can be daunting. Why not choose an employment set up that provides support and guidance? If this sounds appealing then an umbrella company may be your first port of call, they’ll take care of all your Income Tax and National Insurance payments, which guarantees you peace of mind. Partaking in their services still allows you the freedom and flexibility to choose your assignments and working hours. You will be classed as an employee of the umbrella company, which means you will be entitled to the same rights and benefits of permanent employees, which includes holiday sick, maternity, and paternity payments. If you join the Healthchart Family you will also benefit from:

• Faster payments
• 24/7 access to your personal online portal
• A dedicated account manager
• Quick application
• Unwavering compliance
• Holiday pay and pension provision

The second option available is to choose to set up a Limited Company. This will give you more control over your money and is a more tax-efficient way of working. You will also be able to draw dividends from the company and a proportion of this will be tax-free. However, you will have responsibility for all your administration work, filing, and payment deadlines and completing your annual tax return to HMRC.

The other aspect to consider when starting a limited company is your particular function for the end client. In April 2021 reform to IR35 legislation may mean that your duties as a contractor face more in-depth review. Post-April your end client will be responsible (and liable) for deciding whether your job function could be fulfilled by that of a regular company employee. If this is the case then you fall within IR35 parameters and you will not be able to use your limited company to fulfil your duties. This is a major aspect to consider when deciding which way you’d like to present your services.

To remove this uncertainty choosing to contract through an umbrella company may be the smarter move. Because of your fully employed status with an umbrella, you’re automatically removed from the scrutiny of IR35. Your administrative responsibilities would also be greatly reduced in comparison to that of a limited company Director. An umbrella will work heavily with your agency of end client to ensure funds are handled safely and securely on your behalf and will process Tax and NIC leaving you with the net pay, simple.

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.

If you are still unsure about the best option, our customer service team are always on hand to offer support and advice. You can also visit our website www.healthchart.co.uk and request an illustration, this will give you the breakdown of your salary.

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