This is a common contractor question and the answer is… “It depends”!
Setting up your own limited company is easy, just an hour on the Companies House website will be enough, and within a couple of days your new company will be registered and ready to go. But, getting rid of a company is harder. The company has to be formally closed down and struck-off at Companies House.
If you think you may only contract for a short period of time while you are between permanent positions or while you try out contracting to see if the lifestyle suits you, then it would be better to use an umbrella company.
So what are the main differences between a Limited Company and an umbrella?
If you join an umbrella scheme you will:
- Be an employee and so you will pay employers and employees national insurance on your contractor income (employers national insurance is currently 13.8% and employees national insurance is currently 12% on earnings of up to £817 per week);
- You may be able to deduct some travel and subsistence expenses depending on the agreement your umbrella company has with HM Revenue & Customs;
- You will not be able to operate the Flat Rate VAT scheme and so all the VAT you charge will be paid over to HM Revenue & Customs.
If you operate your own Limited company you can:
- Choose how much you take out of the company;
- Choose how you take money from the company, as a dividend or salary with the potential to save both employers and employees national insurance. See our calculator to see how much tax you will pay by operating through a Limited Company or taking all your profits as a salary;
- Join the Flat Rate VAT scheme.
In addition, your company will probably qualify for the Flat Rate VAT scheme. This scheme is designed to make VAT administration simpler but in the main we find that contractors benefit financially as well. Most contractors will pay 14.5% of their VAT inclusive turnover to HM Revenue & Customs with a special rate of 13.5% in the first year.
If you invoice your services at £350 per day (excluding VAT) for 225 days in a year you will charge £15,750 of VAT to your customers. If you use the flat rate scheme you would pay over £12,757.50 (at 13.5% ) in the first year and £13,702.50 (at 14.5%) in the second year – a potential saving of £2992.50 in the first year and £2047.50 in the second year.
If you would like to know more about the benefits for you in operating through your own company then why not book your free consultation today or give us a call.