Worse off running a VAT registered Ltd Co than using an umbrella?

[Waldorf]

Doesn't the benefit of the FRS disappear after the first 12 months?

As an IT contractor, I still gain 2.6% on my net invoice value, so it is well worth having.

[northernladuk]

Doesn't the benefit of the FRS disappear after the first 12 months?

Ask your accountant

[rd409]

This is my first post and this sounds like a stupid question to me but it's one I need answering!

My first contract was through an umbrella company. I never got less than 63% of the day rate with nothing else then to pay out.
I looked at the limited company or umbrella comparisons and decided to go with the limited company and register for the flat rate scheme in the belief I would be better off.
It appears I'm paying 20% of my sales invoices to VAT for HMRC before I pay corporation tax at 20%, employers NI/Paye, accountants fees, insurance.

On the Contractor UK website it says:

In terms of your ability to maximise your income, forming a limited company is the most attractive option, allowing you typically to take home over 80% of what you earn; this compares favourably with umbrella services where you will expect to take home approximately 65% of your earnings.

Am I missing something really obvious here that I should/should not be doing?

Yes, your calculations have a flaw.

You put in the employer's NI and Paye, in the limited calculation, but forgot to mention, that they are also paid by you through umbrella route. Do you think the umbrella pays these expenses from their pocket?

A typical umbrella charges £25 pw, which is almost equivalent to the accountant's fees. If you are registered for FRS, then you gain roughly about 5% of the invoice amount, which is more than enough for all the insurance cost. So cost wise both the sides are almost equal.

Now with limited company if your contract is IR35 friendly (along with other caveats), then you can have tax efficient way of drawing income, as compared to PAYE only with umbrella. If you are married, then you may also be able to use your partner's tax allowance to certain extent, which is not possible through umbrella.

On a like to like basis, there was a difference of about 10% between Umbrella and Limited route when I checked. The only reason you may be better choosing an umbrella is because of your personal preferences, and not financial gains/loss.