When starting out as a contractor, you’ll need to make an important decision straight off the bat, how do you get paid? There are two tried and tested ways of doing this, starting up your own Limited Company or being a part of an Umbrella Company. Both have pros and cons depending on your situation, so it’s important that you take some time to research which would be better for you.
Brookson go into where to start becoming a contractor and whether Limited or Umbrella would be a good choice for you.
An umbrella company is when you hire a third party to take responsibility of accountancy, taxation and administration matters. You’d be paid monthly like an employee, when you complete a contract the client pays the umbrella company and you are paid by them. Just like being an employer of a company, you complete a timesheet who then forwards this to the umbrella company.
This can be an attractive option for people just starting out in contracting as you aren’t given the responsibility of doing everything at once. The mix of contracting and employee practices can help people become accustomed to the contracting life if they’ve just made the transition.
Although it has many pros, it involves you paying out more money to the third party umbrella company to pay for their services. Prices differ from each umbrella company but it’s up to you whether the less administration work outweighs the increased cost.
Running a Limited company is when you’re the director, taking on all the responsibilities that come with it. From company transactions to compliance of all company and statutory issues. As you can probably tell this has far more responsibility than using an umbrella company, which is why it’s normally advised to take the umbrella route when initially starting out, to avoid mistakes that could affect you financially.
Depending on your situation this could be the perfect fit for you though. If you’ve moved away from employment to find more control over your work then a Limited company is exactly what you need. Allowing complete control over all your company matters with full control over revenue and smaller tax burdens. With faster payments and administration processes, it’s the better choice IF you know what you’re doing. You won’t be doing it completely alone, as specialist contractor accountants, such as Brookson, are on hand to help. Doing it alone is extremely rare and only left for those with previous accountancy knowledge as you risk completing tax incorrectly and losing tax benefits through legislation such as IR35.
This also comes with disadvantages, such as requiring a large amount of administration and paperwork compared to an Umbrella company as you’d have the Umbrella there to do it for you. Along with day to day invoicing and liaison with your accountant, it can often mean that your day is fully committed to work with little time for leisure if not done correctly.
Both Limited and Umbrella have their ups and downs, so it’s up to you to delve into what is best for you and your unique situation. Do you want less responsibility but you’re willing to pay a little more every month? Or do you crave that control, to be at the top and run your own business? Speak to a specialist contractor accountant today, like Brookson, and they’ll be able to help you make that choice!