Limited company vs. umbrella company – what do you need to consider?

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The two most established payment structures open to contractors are working through an umbrella company and setting up a limited company.

As a new contractor, it can be difficult choosing between the two, as both have their advantages and disadvantages.

The limited company option offers additional tax benefits and this, coupled with the fact that such a structure offers shareholders limited liability, makes it a popular choice for those planning to contract long term.

However, while there are various benefits limited company contractors enjoy, there is also a significant amount of paperwork to contend with, including chasing payments and working out how much tax they have to pay.

Both of these issues do not apply when using an umbrella company. If you choose to work through an umbrella company, you become their employee and they handle the administrative side of your affairs and ensure you pay the right amount of tax.

On the downside, the additional tax benefits available to limited company contractors cannot be enjoyed if you work through an umbrella company that can provide the right amount of Contractor Insurance.

The pros and cons of each option need to be weighed up, however, they are not the only points you need to consider.

Below, we explore some of the other important issues you need to think about.

Attitude to administration

The amount of paperwork involved in establishing and running a limited company should not be underestimated.

You will be responsible for filing accounts, working out how much tax you have to pay, invoicing and various other duties, which can be time-consuming and tedious.

If this is not a problem for you then the limited company structure may be preferable. However, if you do not have a head for figures and have a negative attitude towards administration, you may be better off exploring the umbrella company option.

Another point to bear in mind is that you can engage the services of an accountancy services provider to assist with the paperwork involved, meaning you can leave the paperwork in the hands of experts and still enjoy the benefits of running a limited company.

Length of contracts

If you only intend to work on assignments short term, the umbrella company route may make more sense.

There are costs involved in establishing a limited company and dissolving one. As a result, it makes little financial sense to set up a limited company if you only intend to contract for a short time.

If, on the other hand, you intend to contract over the long-term, you may benefit from setting up a personal services company.

Inside or outside IR35

Whether your contracts fall inside or outside of IR35 legislation will have a significant bearing on whether you choose to set up a limited company or take employment with an umbrella company.

To enjoy the tax benefits available through the limited company structure, your contracts will need to fall outside of the legislation.

If this is the case, the limited company option would make more sense from a financial point of view.

Control

Another question you need to ask yourself is whether or not you want a significant amount of control over your affairs. If you do want full control, the limited company route is the better option.

If, after considering these and other points, you still cannot come to a decision, working through an umbrella company may be a sensible way forward, as it is easier to move from contracting through an umbrella company to setting up a limited company rather than vice versa.

Choosing between the two options is not easy but nevertheless, it is something that must be done. It is important to do thorough research into each and seek professional advice to help you come to an informed decision.