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  1. #1

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    Default 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!

  2. #2

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    Default

    Thanks, Simon, post of the year.

    Scotspine, please, please, please put this on a sticky.

  3. #3

    Should post faster


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    Default Composites

    Composite

    A Composite Company is one where a number of contractors use the same Company to invoice through. The system works in much the same way as an Umbrella, but the tax payable is less (assuming you are not caught by IR35)
    Simon - I thought composites wouldn't touch you if there was a possibility that you would be caught by IR35? The reason being that this made the holding of the shares pointless as well as mucking up the amount that could be distributed to the other "shareholders".

    I also understood that there was already legislation passed in 2003 that took away the tax benefits of issuing "alphabet" shares?

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    Default Composites

    Quite correct Bradley - inside IR35 and the composites won't (or shouldn't!) touch you.

    I'm not aware of any legislation that prevents the issuing of and the benefits derived from multiple share classes - certainly any composite Company trading today uses that method to administer things.

  5. #5

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    Default

    Simon - thanks for this, always nice (and highly satisfying!) to be proved right by a professional. I knew there was a reason I used you!
    Blog? What blog...?

  6. #6

    Still gathering requirements...


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    Default my only quibble

    would be that the figures quoted relate to income over three years. Is there a reason for that? I know it makes the difference more obvious, but....

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    Default 3 years

    Sure - we've found out from experience that the average time for contracting is between 2 and 4 years, so 3 years was a nice middle ground. Also, the taper relief which can form an important part of the tax planning process doesn't kick in until after 2 years.

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    Default fair enough.

    thanks Simon.

  9. #9

    Still gathering requirements...


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    Default great stuff

    Couldn't agree more that this should be a sticky thread at the top. Most of what we regulars always say to the newbies and finally it's from a genuine accountant. No more excuses folks !

    My only comment is that you'll find people asking "how close can I sail to the wind" and expect serious anwsers ... and the odd person who always reply "the IR are crap, you can take the p1ss no problem".

  10. #10

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    Default

    Quote Originally Posted by partimer
    Couldn't agree more that this should be a sticky thread at the top.
    I'd go farther and say that this should be a sticky thread at the top, and newbies should read it before asking those same questions less cogently.

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