Should I trade as a Limited Company or umbrella
Hi everyone,
Can't help but notice that there are many posts on here that ask the same question - should I use an umbrella or my own Ltd Company. Thought it might be useful to summarise once and for all the pros and cons of each method and how much you would be likely to take home. Might save some of you long suffering regulars a bit of time!
Operating your own Limited Company
Running your own Company means that you are running your own business. You will be a Company Director, operate the Company bank account, and be responsible for the affairs of the Company.
Benefits
The most tax efficient way of working meaning you get to keep more of your income;
You keep complete control of your financial affairs meaning you do not have to risk your money with any third party administrator;
You are running your own business so you can undertake other work outside your normal contract role;
Legitimately claim a wider range of expenses (training, equipment, software, etc);
Downsides
There is a certain amount of paperwork involved;
There are various deadlines which if missed could incur penalties (any good accountant will of course make sure you don’t miss these)
Umbrella
An Umbrella service is where you are essentially a PAYE employee of the Umbrella. The way it works is that your client or agent enters a contract with the Umbrella for your services, and you enter into a contract with the Umbrella.
Benefits
Very easy to use, all tax and NI deducted before you get paid;
Send in timesheets/expense details and wait to be paid.
Downsides
The most expensive way of working in terms of Tax and NI;
You are reliant on the Umbrella Company to collect your money from the client or agent and then to pay it on to you.
How much will I take home?
Outside IR35
If you fall outside IR35 the comparative income to you on the three choices, would be as follows, taken over a three year period:
Contract value Own Ltd Co Umbrella Composite
£50,000 pa £107,609.74 £89,595.48 £100,590.86
£75,000 pa £148,510.44 £124,251.50 £138,490.02
£100,000 pa £189,410.75 £158,898.50 £171,764.77
I have not taken into account expenses in calculating these figures as whichever system you use, the allowable expenses will be identical. Do NOT believe the marketing hype regarding “special dispensations” you may have come across. For an expense to be allowable you must have actually spent the amount in question.
Inside IR35
If you fall inside IR35 then the tax payable via an umbrella or composite Company will be around the same. There will be a saving of around 5% if you operate through your own Limited Company.
Hope this helps, and feel free to add anything else you think useful.
Last edited by simonsjdaccountancy : 14th May 2008 at 15:34.
Reason: legislation changes!
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