Limited vs Umbrella

For many people, making the move into contracting can be one of the most life-changing decisions they make. There are many things to consider, and one of the most important is how you plan to organise your finances. The two most popular choices are either umbrella employment, or becoming a director of your own limited company.  

So what do both entail? What are the differences and which is mostly likely to suit your needs?

Limited vs PAYE Umbrella

 

Limited company

Umbrella company

Earnings potential

This is most likely the most tax efficient approach for contractors – as you can plan your finances in a way that lets you retain more of your contracting income

 

Less tax efficient than operating through your own limited company as there are no tax planning opportunities, and so leads to lower income

 

Administration/paperwork

As a company director, you are responsible for maintaining accurate records and ensuring that your accounts are filed correctly.

 

The only administration responsibility will be the submission of your timesheet and possibly expenses claims.

 

Payment processes

You are responsible for invoicing clients and for managing your company bank account. The recruitment agency or end client pays your company directly, and then you withdraw funds from your company and manage your own tax and national insurance payments.

 

The umbrella company acts as your employer, so they invoice your client and then pay you, after all of the statutory deductions.

 

Tax calculations

You have the opportunity to plan your taxes through a combination of salary and dividends, with help from a specialist contractor accountant.

 

Tax and national insurance is calculated by the umbrella company and paid on a PAYE basis, for all of your contracting income.

 

Take home percentage

With a limited company, you retain around 86% of your earnings.

 

With an umbrella company, you retain around 68% of your earnings.

 

Our summary

This option is best for contractors who want to complete control over their careers and finances, and who see the freedom and advantages of contracting as a long-term option. It’s also preferable if you want to work in the most tax efficient way.

 

A better route for contractors with lower daily rates, who are likely to be contracting only for the short term and so want a quick and easy setup. This approach is also more suited to people who do not want the responsibilities of running a limited company.

 

PAYE Umbrella Company   

Umbrella companies provide employment to contractors, so you’ll be a permanent employee of the umbrella company, with all the associated rights and protections. As your employer, the umbrella will calculate your pay on a PAYE basis and pay any tax and national insurance to HMRC, so you won’t be personally responsible.

Umbrella employment is usually the better choice if you’re working inside IR35 or if you’re new to contracting and you’re not sure if it’s going to be a long-term career. You might also choose umbrella if you prefer the security and convenience of continuous employment.

If you think umbrella employment may be the best option for you, Orange Genie Umbrella is the perfect solution. To join Orange Genie Umbrella or for more information, please contact us on 01296 468 483 or email umbrella@orangegenie.com.   

Limited Companies

The other option is to set up your own limited company, also known as a PSC (Personal Service Company). You would be a director of the company, and you would be responsible for making sure the correct payments are made to HMRC. Your Orange Genie accountant will help you with this.

This might be the best choice if you expect to earn over £120 per day and your contract falls outside IR35. You might also choose this route if you want the autonomy and flexibility of being the director of your own limited company.

Benefits include:

  • A greater degree of flexibility on your working hours
  • Higher rates of take-home pay, which is only fair as you won’t be entitled to employee benefits such as sick pay and holiday pay
  • Tax planning opportunities
  • It also means you get to be your own boss.

If you think becoming a director of your own limited company may be the best option for you, Orange Genie Accountancy can help. To appoint Orange Genie Accountancy, or for more information, please contact us on 01296 468 185 or email accountancy@orangegenie.com

Setting Up Your Limited Company

Setting up a limited company is simple, all you would need to do is form the company and open a business bank account, and Orange Genie Accountancy can do this for you. Before forming your company is it best to speak to us to find out more about IR35 and if your contract could be caught by it.

IR35 is a rule designed to ascertain whether someone is a disguised employee or whether they are genuinely in business on their own account. If you are seen to be inside IR35 you would have to pay more tax, but this doesn't necessarily mean it wouldn’t be beneficial to work through a limited company.

If you’re outside IR35 you will be able to take advantage of tax planning opportunities, such as:

  • Drawing dividends from your company which will not be subject to National Insurance contributions.
  • The ability to claim a wider range of tax-free business expenses, such as travel and subsistence, accountancy fees and hardware and software costs.
  • Registering for the flat rate VAT scheme, which allows you to charge 20% VAT but only pay HMRC at a lower rate. From 1st of April 2017 the rate is 16.5% for a limited cost trader, which will include the majority of contractors.

Orange Genie provide both umbrella and limited services to our contractors and freelancers. Our best advice team are here to help contractors understand both models. For more information please call us on 01296 468 483 or email accountancy@orangegenie.com.

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Why Orange Genie Accountancy?

Orange Genie Accountancy offers fixed fee accountancy packages to contractors and freelancers. Each client has unlimited access to their own dedicated approachable and friendly accountant. All Orange Genie Accountancy accountants are specialists in the contracting market, so they can give you bespoke, high quality advice.

We will always keep you informed about anything that could affect you and your company. Our relationships with our clients are extremely important to us so we'll be in touch often, whether it be face to face, over the telephone or email.

Our packages start at £75 + VAT a month for an online service. Our most popular package is £120 + VAT a month which provides you with your very own dedicated accountant as well as:

  • Unlimited accountancy support
  • Face to face meetings so we can get to know you and understand your contracting goals
  • Proactive contact
  • Director and employee payroll
  • Annual Return
  • Self-Assessment Return
  • A fully compliant service so you are safe in the knowledge that you are meeting your legal obligations
  • Access to the Freeagent Software, which is updated in real time so you can always see how your business finances are looking

​And much more, includingaccess to wealth management advice, IR35 reviews and pensions planning. 

If you would like to appoint Orange Genie Accountancy as your accountants please either fill out our enquiry form or give one of our friendly expert accountants a call on 01296 468 185 or email accountancy@orangegenie.com

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