Contractors generally have two main payment structures to pick from: working with an umbrella company or setting up a limited company. For beginners, choosing between these can be tough since each has its own advantages and downsides.
Going the limited company route usually offers more tax benefits and limited liability for shareholders, making it appealing for those planning to contract long-term. However, this path involves a lot of administrative work, like keeping track of payments and figuring out taxes.
On the other hand, working through an umbrella company frees contractors from these administrative hassles. The umbrella company acts as your direct employer and handles all the administrative tasks, ensuring taxes are paid correctly. But contractors in an umbrella company don’t get the extra tax benefits that limited company contractors do.
Beyond comparing the pros and cons, there are a few other factors to consider:
Your attitude towards paperwork: Running a limited company requires handling a lot of paperwork—filing accounts, calculating taxes, invoicing, and more. If you can manage this, a limited company might be the way to go. If you’d rather avoid paperwork, an umbrella company could be better. You can also hire an accountant to help with the paperwork, so you get the benefits of a limited company without the hassle.
Contract length: For short-term contracts, setting up and then closing a limited company might not be worth the effort and cost, making umbrella companies a more practical option. But if you’re looking at long-term contracts, creating a personal services company could be more beneficial.
IR35 rules: Your decision might also hinge on whether your contracts fall inside or outside IR35 regulations. To get tax benefits with a limited company, your contracts should ideally fall outside this legislation. In that case, a limited company might make more financial sense.
Level of control: If having full control over your business is important to you, a limited company would suit you better.
If you’re still unsure after thinking about these factors, starting with an umbrella company might be a good idea. You can always switch to a limited company later if needed. Deciding between these two options is challenging, so thorough research and professional advice are crucial for making the right choice.