If you’re just starting out as a contractor, one of the first decisions you’ll need to make is whether to join an umbrella company or set up your own limited company. There is no right or wrong answer: it’s simply a case of deciding what’s right for you. A lot will depend on your personal priorities and preferences.
Having said that, there are several indicators that we use when chatting to contracting newcomers who are having trouble deciding which route to go down. Here is our three-point guide to answering that age-old contractor question: umbrella company or limited company?
1) Look at your potential earnings
As a general rule of thumb, if you’re going to be earning approximately £14-20 per hour or £30,000 a year it makes sense to form a limited company and operate as the director. This is because the tax advantages offered by going limited are particularly pronounced for higher earners. If, however, you will be earning less than that it may make more sense to operate through an umbrella company.
This is not set in stone, of course – there are plenty of high-earning umbrella contractors who have chosen not to go limited. Conversely, some people set up a Personal Service Company (PSC) when their earning power is below the benchmark mentioned above.
2) Consider the paperwork
Operating through your own limited company is more tax efficient than umbrella employment but, to paraphrase an old saying, with great (financial) power comes great responsibility. As a company director you’ll have more administrative responsibilities than your umbrella counterparts who, because they are PAYE employees of the umbrella company, have all of their tax and paperwork taken care of.
Going limited means finding a contractor accountant, maintaining-up-to-date business records and keeping HMRC happy by staying on top of your tax payments. If you’re happy to spend about an hour a month on admin in pursuit of greater take-home pay, then going limited could well be right for you.
If, however, the thought of business accounts, invoices and VAT makes you feel nauseous then you might be better off with an umbrella company.
3) Think long term
If you intend to work as a contractor for at least a year, we would advise giving the limited company option serious consideration. Even if your first assignment is only for a few weeks or months, you may know deep down that working flexibly is a long-term career choice for you. The chances are you’re a company director in waiting.
On the other hand, if you are ‘dipping your toe in the water’ in order to see if contracting is right for you, or see it as a stop-gap between permanent roles, then the umbrella route would route be advisable. You can always go limited at a later date.
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ADVANCE can advise would-be contractors on the best option for them. Contact us today on 01244 564 564 to discuss your options with one of our experienced advisors.
Image courtesy of Ron Cogswell on Flickr.