HELP LTD Company VS Umbrella

[alxpostiglione]

Hi Everyone

I am new to contracting and need some advice! I have been contracting for 6 months now through an Umbrella Company. I have been told recently I can save huge amounts of money by setting up a LTD company. A few companys like SJD accounting has told me from 27,000 per annum before tax could equate to 1,800 after tax which is incredible compared to Umbrella companys offering 1,400. I am just utterly confused to how this saving can be made? It doesnt seem logical. Could someone break it down for me? Also I keep hearing to make the saving you will have to pay yourself dividens, do you pay tax on this?

Thanks alex

[northernladuk]

Hi Everyone

I am new to contracting and need some advice! I have been contracting for 6 months now through an Umbrella Company. I have been told recently I can save huge amounts of money by setting up a LTD company. A few companys like SJD accounting has told me from 27,000 per annum before tax could equate to 1,800 after tax which is incredible compared to Umbrella companys offering 1,400. I am just utterly confused to how this saving can be made? It doesnt seem logical. Could someone break it down for me? Also I keep hearing to make the saving you will have to pay yourself dividens, do you pay tax on this?

Thanks alex

Have you bothered to read the sticky in this very forum about Umbrella V LTD? Have you bothered to do any research using the links on the side of this forum. Have you tried searching first? A bit of effort researching things first really would pay dividends (Hint : DIVIDENDS!)

Maybe research some basic accountancy would also help. Once you have done a bit of work for yourself then maybe you can come and ask something people will be willing to help you with?

[LisaContractorUmbrella]

As Northernlad said there is a sticky that should explain all you need to know. However, you should be aware that such a big saving would be dependent on whether your contract fell inside or outside of IR35. If your contract was inside you would have to pay yourself via PAYE, i.e. in the same way as you receive payment from your umbrella company; if your contract is outside you can then claim dividends. Your contract AND working practises would need to be reviewed by an expert (SJD do offer this service) as the penalties for getting it wrong can be huge - see Dragonfly Consultancy v. HMRC

[SallyPlanIT]

Hi Everyone

I am new to contracting and need some advice! I have been contracting for 6 months now through an Umbrella Company. I have been told recently I can save huge amounts of money by setting up a LTD company. A few companys like SJD accounting has told me from 27,000 per annum before tax could equate to 1,800 after tax which is incredible compared to Umbrella companys offering 1,400. I am just utterly confused to how this saving can be made? It doesnt seem logical. Could someone break it down for me? Also I keep hearing to make the saving you will have to pay yourself dividens, do you pay tax on this?

Thanks alex

Hi Alex

If you were outside of IR35 and trading via a limited company you can take the bulk of your money as dividends. This saves 12.8% in employer's national insurance contributions (NICs). You personally do not pay any NICs either, currently 11% as an employee.

Whereas the higher (1st rate) tax rate on PAYE is 40%, it's only 32.5% on dividends. All the tax thresholds are the same regardless of whether the income is dividend (known as un-earned income) or PAYE.

[ads1980]

Hi Everyone

I am new to contracting and need some advice! I have been contracting for 6 months now through an Umbrella Company. I have been told recently I can save huge amounts of money by setting up a LTD company. A few companys like SJD accounting has told me from 27,000 per annum before tax could equate to 1,800 after tax which is incredible compared to Umbrella companys offering 1,400. I am just utterly confused to how this saving can be made? It doesnt seem logical. Could someone break it down for me? Also I keep hearing to make the saving you will have to pay yourself dividens, do you pay tax on this?

Thanks alex

Hi Alex,

I have recently switched from an Umbrella Company to my own Ltd. I was with the Umbrella Company for 2 years. I feel that I am more in control of my money and know exactly how much will be going in and out of the account and I do find it interesting too. You will need to read up on quite a few things before you decide if it is worth your while. How long can you see yourself contracting for? If it is only a short while, I would stick with the Umbrella company. Have a read around and see what you think. If you do decide to go down the Ltd route I can certainly recommend a great accountant if you want to PM me?

[SallyPlanIT]

Hi Alex,

You will need to read up on quite a few things before you decide if it is worth your while. How long can you see yourself contracting for? If it is only a short while, I would stick with the Umbrella company. Have a read around and see what you think. If you do decide to go down the Ltd route I can certainly recommend a great accountant if you want to PM me?

Alex

I'm happy to discuss more about the limited route and whether it would suit you personally. If you're interested, PM me your contact details and I'll be in touch, after hours is fine if necessary.

[Wanderer]

Could someone break it down for me? Also I keep hearing to make the saving you will have to pay yourself dividens, do you pay tax on this?

Well, I did have a quick look through the first timers guide (which I presume you have read too) but I couldn't really see that it gives a clear answer to your question so I'll answer it.

If you are outside IR35 (and why the hell not) then your company will pay you a minimum wage, about 7,000 pounds which is right on the threashold for starting to pay tax and you only pay a tiny amount of PAYE and NI.

This leaves the rest of the company's earnings (from your contract work) minus expenses as profit. The company then pays out the profit to it's shareholders (you) as dividends which get taxed at ~20% but don't attract Employers NI or Employee's NI. Right there is the big saving. If you get paid under PAYE (an umbrella or IR35 caught) then as an employer, your company has to pay employers NI ~12%, as an Employee, you have to pay Employee's NI ~10% then personal tax ~25%. I really can't remember exactly what the percentages are but these are ball park.

Google for IR35 calculator to get an independent view of the sums.

If you are lucky enough to earn enough to put you into the higher rate tax bracket then you have a few options.

You and your spouse can split your earnings if your spouse doesn't work.
You can retain the money in your company and take it out in a different tax year when you are back below the limit, unemployed, retired etc.
You can close the company down and take the money as an ESC-16

[northernladuk]

Well, I did have a quick look through the first timers guide (which I presume you have read too) but I couldn't really see that it gives a clear answer to your question so I'll answer it.

If you are outside IR35 (and why the hell not) then your company will pay you a minimum wage, about 7,000 pounds which is right on the threashold for starting to pay tax and you only pay a tiny amount of PAYE and NI.

This leaves the rest of the company's earnings (from your contract work) minus expenses as profit. The company then pays out the profit to it's shareholders (you) as dividends which get taxed at ~20% but don't attract Employers NI or Employee's NI. Right there is the big saving. If you get paid under PAYE (an umbrella or IR35 caught) then as an employer, your company has to pay employers NI ~12%, as an Employee, you have to pay Employee's NI ~10% then personal tax ~25%. I really can't remember exactly what the percentages are but these are ball park.

Google for IR35 calculator to get an independent view of the sums.

If you are lucky enough to earn enough to put you into the higher rate tax bracket then you have a few options.

You and your spouse can split your earnings if your spouse doesn't work.
You can retain the money in your company and take it out in a different tax year when you are back below the limit, unemployed, retired etc.
You can close the company down and take the money as an ESC-16

Wanderer you are far too nice You make me look like a miserable old snotbag by you answering politely and correctly to unresearced and unthought out posts I am sick of giving you positive rep lol

[MarillionFan]

Wanderer you are far too nice You make me look like a miserable old snotbag by answering politely and correctly to unresearced and unthought out posts I am sick of giving you positive rep lol

Oh come on NL. Your first reply to every question is. 'Sigh! Have you searched the forum'. You'd have made Raoul Moat look helpful.

[northernladuk]

Oh come on NL. Your first reply to every question is. 'Sigh! Have you searched the forum'. You'd have made Raoul Moat look helpful.

Least I would hold my hands up and say 'Guilty m'lud'