Umbrella Company or Limited Company the choice

what is an umbrella company
Contractor umbrella companies

Umbrella Company or Limited Company the Choice was written by Gerry McLaughlin.

Umbrella Company or Limited Company

Should I be in an Umbrella Company or Limited Company is a choice facing most contractors.

There are several good reasons for Contractors choosing to be in an Umbrella Company rather than a limited company

1. They are Inside IR35 Tax

If contractors are caught by IR35 Tax then an Umbrella Company is by far the best vehicle for them. In an Umbrella company they can claim some expenses against tax. See our article What Umbrella Company Expenses can be claimed against tax?

2. They Fear they may be Inside IR35 Tax

Many contractors are unsure if they are inside IR35 or outside it.

Many don‘t want the hassle of a potential investigation lasting years – so they just join an Umbrella company to have peace of mind and so they can sleep soundly at night even if they end up paying more tax than they would if they operated under a Limited Company.

3. They don‘t want the hassle and the paperwork

Most Umbrella Companies take the hassle away from contractors. Contractors can then spend their time doing what they do best and that is contracting. They are effectively sending out the paperwork and all the hassle to the Umbrella Companies to do such as the tax and NIC and they don‘t have to worry about VAT – or an inspection.

They have to pay more tax than they would as a Limited Company contractor but that is offset by peace of mind and a hassle-free life – as regards HMRC anyway.

4. They get their Pay quicker

Many Umbrella companies pay contractors on receipt of a timesheet – before the client company or agency have even paid up. This avoids the hassle for contractors of waiting for payment or even chasing the agency.

Limited Companies

The main advantage of operating as a Limited company is our old friend cash.

It has been estimated that Limited Company contractors can save around £10,000 a year on tax and NI contributions.

That is quite a pile that your Accountant can save you.

IR35 Worry

However, IR35 legislation is not exact and it is open to interpretation as to whether a contractor is inside or outside.

Also, a contractor may have been outside IR35 for one contract and inside for the next contract as it has been based on contract rather than contractor – although HMRC are saying they will skew it more towards the contractor‘s normal way of working rather than contract by contract.

Still, the Limited Company contractor always has that worry that there may come a knock on the door followed by years of hassle from HMRC before having to pay back seven years worth of back tax which could potentially ruin him or her.

That extra £10,000 a year is tempting, though.

It is often down to the individual contractor if they want to take the risk or not.

So, the choice of Umbrella Company or Limited Company depends on your circumstances.

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If you do need an umbrella company you could try one of the following:-

Simply Umbrella

Public Sector Umbrella Company

All-inclusive contractor accountancy service. Best value in the UK for a personal service, no tie in periods and an accounting package tailored to you –  Aardvark Accounting.

For Mortgages specially designed for contractors try Specialist Contractor Mortgages.

Have a look at our Contractor Job Search section.