Umbrella Company or Limited Company (PSC)

11/02/2011 - 00:00


• Introduction

• Umbrella

• Limited

• Which is best for me?

• Who are PayMatters?


When becoming a freelance contractor there are a number of important decisions you need to make. The first is ensuring you get a contract that best suits your skills and not just offers the best rate of pay but will still present you with opportunities to increase your skill set and so contribute to your career.

The second decision is how will I get paid? There are two options that the vast majority of contractors choose between, working via an Umbrella company or through their own Limited company. This guide will take you through the benefits of each and illustrate which will best suit your individual circumstances.

If you would like further information and a financial illustration based on your individual circumstances then don’t hesitate to give us a call on 0800 121 6513 and one of our experienced new business advisors will be happy to take you through it.

Umbrella Company

An umbrella company is the simplest way, out of these options, for freelance contractors to work.

Essentially you are an employee of the umbrella company and so are able to retain all the benefits of being an employee in terms of not having to worry about getting paid, however you are able to claim ‘allowable’ (expenses incurred such as travel, meals, and accommodation which are required for you to carry out your role) expenses and off set them against your tax liabilities.

You would submit a time sheet to your umbrella company and they will invoice your agency on your behalf and process any allowable expenses you send into them. They will then receive the funds from the Agency, deduct National Insurance and PAYE contributions, off set your expenses and pay you direct into your personal account and provide a payslip.

As an employee of the umbrella company you are typically covered for the necessary insurances of Professional Indemnity, Public Liability and Employers Liability.

You also don’t have to worry about IR35 legislation as you are not declaring dividends.

Working via an Umbrella company is often the choice of first time contractors as they become accustomed to working self-employed. This low hassle option provides a simple vehicle to get paid while still working as a contractor and benefiting from the higher rates of pay available through your agency.

Limited Company

Working via a limited company includes a little more responsibility than an Umbrella company, however with more responsibilities comes more rewards and financially there is an obvious benefit as you can on average take home approximately 80% of your earnings.

Running your own limited company requires you to be both a director and a shareholder of the company and so the responsibility of running the business, submitting annual and quarterly returns, managing the company bank account and ensuring you are covered for the right insurances lies with you. Although all these responsibilities can appear daunting, with a contractor accountant such as PayMatters, running your own business can be made much easier.

The first step would be to choose a name then incorporate your own limited company, you would then need to open a business bank account and once this has been completed you will be ready to start trading. PayMatters can assist and will incorporate the company; we also have a business partnership with NatWest with regards to opening a business bank account.

You should also be aware that if you think your business will generate a turnover above £73,000 then you will be required to register for VAT. However should the turnover be under £150,000 then you are able to register for the Flat Rate VAT scheme, which will allow you to claim some of the VAT back.

At PayMatters we register each limited company for the Flat Rate Scheme, under the FRS a limited company receiving VAT at 20% can repay the VAT on the gross invoice received at as little as 8%, the difference (known as flat rate benefit), whilst still subject to Corporation Tax, is available to withdraw as dividends.

If you employ a specialist contractor accountant you would submit a timesheet (With PayMatters and our online accounting system, you can raise invoices that you can then submit to your agency whilst also incorporating the invoice into your company’s accounts) and your accountant would then invoice your agency on your behalf up request, the gross funds would then be paid into your business bank account. Your accountant will provide you with details of what you can withdraw as your income and what you should leave in your business account for your tax contributions (PayMatters provide this information through your online portal). Should you register for VAT your contributions to HMRC are due on a quarterly basis and your accountant would provide you with all the details of what amount is due and where to pay, you will simply be responsible for making the payment.

Your company will also be required to submit corporation tax and PAYE contributions as well as all the standard returns to HMRC along with a companies house annual return, as with VAT, your accountant will provide you with all the information and where and when to submit these returns. They will also indicate how much needs paying to HMRC for each contribution and where to pay the money. Therefore your accountant does all the complicated parts and your responsibility will be to pay the necessary funds and submit the returns with your signature on.

In terms of pay structure the financial benefit of running your own limited company comes through the ability to declare dividends. Traditionally you would pay yourself a small salary, enough to ensure you are making the necessary PAYE contributions, the remaining funds can then be taken as dividends which are not taxed until you go into the higher rate tax bracket, if this is the case you are taxed 25% of the net dividends taken.

There are other options such as adding a second shareholder, it is possible to employ or have as a shareholder a partner or spouse that are active in your business and utilise their personal allowances and lower tax bands. Also by having a limited status you project a more professional appearance to potential clients and provides them with a sense of confidence in your business.

It is important as a freelance contractor working through a limited company that you understand the possible implications associated with your employment status and in particular IR35.

IR35 was introduced to stop the use of an intermediary, usually a limited company or partnership, to “disguise” an employment relationship between the contractor and their end client. By using an intermediary, the contractor could receive income as a mixture of wages, expenses and dividends which resulted in an increase to net pay when compared to being a direct employee of the client. Therefore if you are going to benefit financially from using a limited company through receiving dividends, you must be compliant with IR35.

As part of our standard Limited Company service we will include an IR35 review of your contract and working practices.

Which is best for me?

Understandably there are many scenarios that you could find yourself in when becoming a contractor therefore the right advice is paramount. For truly individual advice and a financial illustration give one of our experienced advisors a call on 0800 121 6513.

We can show you your take home pay both both options.

Those new to contracting tend to begin by going Umbrella to see how they take to working as a freelance professional, gaining knowledge on contracts, the roles available and the new approach to work. It is after this ‘bedding in’ period that they decide to either go back to a permanent position or commit to contracting and look to open their own limited company.

Some begin contracting after a sustained period of understanding everything involved and go straight for their own limited company and commit from the start. However there are certain criteria, we would always advise that you are earning at least £15 and that you will be contracting for a minimum of 12 months. The length of time is important in the eyes of HMRC as by opening a limited company you would be demonstrating a commitment to contracting. Also an accountant will charge you to close a company down and this could reduce the financial benefit available if you only work short term.

Who are PayMatters?

PayMatters provide a value for money, fast, friendly and professional service.

With a highly experienced team, supported by Chartered Accountants, we offer Umbrella and Limited Company accountancy services for freelance contractors.

The benefits of choosing PayMatters include:

• Your own account manager who will deal with all of your day to day queries and become someone you can truly rely on

• We are fully HMRC compliant and our systems, documentation and contracts have all been independently reviewed and approved

• Online, telephone and SMS services designed to suit your needs

• Ability to process currencies other than £sterling e.g. Euros etc

• Flexible payment options; Faster Payments, CHAPs and BACs

• Access to Insurance brokers who provide competitive rates to tailored packages suitable to your individual circumstances

Call us today and see how we make running your own business as straightforward as possible

Tel: 0800 121 6513