Limited or umbrella company?

1 August 2022

If you are going to work as a contractor either through an agency or directly with a client, you will more than likely be required to operate as a Limited Company. 

You may well be faced with the prospect of being forced to operate through an umbrella company if your potential engager decides that you will be caught by the IR35 rules. 

Limited Company

With your own Limited Company, you will be a director and/or secretary and will hold either all or part of the shares.  You will be responsible for filing the annual accounts and annual return with Companies House and dealing with the corporation tax return, VAT returns and P11ds for HMRC.  As a director you also have a responsibility for ensuring adequate accounting records are kept which show the position of the company at any time.  You may do yourself or perhaps get your accountant to deal with this on your behalf.  You will be able to decide how you take your remuneration package which will probably be a mixture of salary and dividends.  There may also be opportunities for you to pass income to your spouse for actual work carried out and this will be on a commercial basis for the work done.  The down side of the Limited Company will be the red tape and potential penalties which can be suffered for late filing of documents however; an accountant can help you work through the legislation and avoid the penalties.    

Umbrella Company

This type of company is run by an Umbrella Company provider.  You will not be a director or secretary or have any of the responsibilities of running a Limited Company.  You will pass time sheets and valid business expenses to the people running the company, usually a firm of accountants, who will issue a monthly invoice to the client you worked for.  They will then calculate your wages under PAYE after deducting both your expenses and their fees.  The Umbrella Company will also deal with any P11d information which has to be reported to HMRC.  Under this arrangement everything is done for you so you will have peace of mind and no risk.  The down side of this is that all your income is taxed under PAYE and you will therefore likely have a higher overall tax liability than via your own Limited Company.     

Factors which will affect your choice

The main things that you will need to consider when making a choice, if you have one, are the following:

• Are you caught by IR35?  If you are going to be contracting with a small company, you will still have to decide if you are caught by the IR35 rules.  If you are, you will not be in a position to plan your remuneration package as the majority of your income will have to be paid out under PAYE by way of a deemed payment.  You may still want to have you own Limited Company in this situation and save the fees charged by the umbrella.
• You may be forced to use an Umbrella Company as your prospective engager considers you are caught by IR35.  All Public sector bodies and now private companies which are not small have to make this decision ahead of the engagement.
• You may think that life is too short to be dealing with the red tape involved in running a Company and are happy to leave this to others in which case you might choose an Umbrella Company.
• If you are a borderline case, and may be caught by IR35, it will be your attitude to the risk of being picked up for an HMRC investigation.  You should certainly have your contract reviewed if it is not a clear cut and outside of IR35 case.
• If your engager issues a Status Determination Statement which states you are caught by IR35, you can question the decision and give the reasons why you consider you are not caught by IR35.

What is important before you decide on which route to take; is to make sure that your contract is not caught by IR35.  If you would are thinking of starting out as a contractor, why not contact us and arrange for a review of your contract?

If you are confident that you are outside IR35 and you want to set up a Limited Company, please contact us and we will deal with this for you ensuring that the company is correctly incorporated at Companies House.