There is one question we get asked every day, not nearly every day or most days but actually every single day. “How much better off will I be using a limited company over an Umbrella company”
The main savings with a Limited Company over an umbrella are around National Insurance and the Flat Rate VAT Scheme.
National Insurance Savings
With an umbrella company you will pay both employees and employers NI (Employers NI is 13.8% of your salary, and employees NI 12% for the first £770 a week, and 1% thereafter (both after tax free personal allowances).
On a typical contract of say £350 per day you will pay around £300 a week in NI through an umbrella company whereas with your own Limited Company you will pay just £30, so the NI savings alone come to about £12,000 a year assuming a 45 week working year.
If you are a contractor on £200 per day you'll save around £9,000 or if on £600 a day save around £20,000.
Flat Rate VAT Scheme
The flat rate scheme is an incentive provided by the government to help simplify taxes. For example as an IT Contractor you would charge VAT on your invoices at 20% (2011 rate) but only pay back the Revenue in your first year 13.5% of the gross amount and 14.5% in subsequent years.
This provides the following additional income (based on a 45 week working year):
• £200 per day contract - £1,710 extra per year
• £350 per day contract - £2,992.50 extra per year
• £600 per day contract - £5,130 extra per year
On top of NI and VAT you'll also earn interest in your savings (savings put aside to pay for your taxes) plus have access to a broader scope of expenses than using an umbrella company.
One way of looking at it is, if you have two contractors both on the same £600 per day. One contractor ‘A’ uses an Umbrella company and another ‘B’ trades through their own limited company the difference after the affect of NI and flat rate VAT scheme are as follow:
A - (Umbrella) real value of contract after NI is around £115,000
B - (Ltd Co) real value of contract after NI and Flat rate VAT is around £138,000
An extra £23,000 on the contract value, that’s like billing your clients an 38 days per year.
The above does assume the contractors are outside IR35, if inside you can still claim: travelling and accommodation expenses, 5% of your turnover, benefit from the VAT flat rate scheme and receive interest on the funds held within your own company.
Basically, income tax or corporation tax and personal taxes via an umbrella company or through your own limited company are roughly the same. There are of course more opportunities for tax planning through a Ltd Co but that’s something you can discuss in greater detail with an accountant.
I hope this information was helpful.