First Timer’s Guide to Contracting

If you are thinking of moving from permanent employment to contracting, the first step is deciding how you want to work. There are two main pathways for you to consider, operating through your own limited company or working through an umbrella company. The avenue you decide will dictate your level of control, your take home pay and your responsibilities, but do you know which is best for you?

We’ve put together all of the information you’ll need about the differences between a limited company and an umbrella company, and what each could mean for you.

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Operating through your own limited company

By choosing this route, you will become the director of your own limited company and be responsible for all tax contributions and relevant paperwork. If you're earning over £25,000 and keen to make a career of contracting, this could be the best option for you.

Although many new contractors find the idea of running a limited company for the first time daunting, help is at hand. Managing your own limited company with the support of a specialist contractor accountant is simple, efficient and inexpensive.

Contracting through your own limited company does require a little more work than using an umbrella company. Before you begin trading, you must complete the following steps:

• Choose a name for your limited company
• Form your limited company
• Open a business bank account

Once you have completed these steps, we would recommend appointing a specialist contractor accountant to deal with your company needs and tax affairs.

You will typically take home around 75% - 80% of your contract by working through your own limited company.

Advantages of contracting through a limited company

• The most tax efficient way of working
• Claim a wide range of expenses
• Access to the Flat Rate VAT Scheme

• Personal assets are protected
• Greater opportunity for tax planning
• Company given more credibility

Downsides of contracting through a limited company

• There is a certain amount of paperwork involved, however this only takes up a few minutes of your time each month
• Accounts need to be filed each year

• Costly if contracting for a short period of time

Can’t decide? Get the guide

For a much more thorough assessment of contracting through limited or umbrella, download our guide.

What’s in the guide?

• Umbrella & Limited – the differences between the two structures.
• Advantages & disadvantages – which route is best for you?
• Rates of take-home pay – how much could you earn?

GET THE GUIDE

Contracting through an umbrella company

If you choose this route, your Income Tax and National Insurance Contributions are deducted on your behalf. This may be the best route for you if you expect to earn under £25,000 annually, and are working on a short term contract of fewer than 3 months.

Contracting through an umbrella company means that you become an employee of that company. When you join, your client or recruitment agent enters a contract with the umbrella company for your services, and you enter into a contract with the umbrella company.

You'll typically take home around 60% - 65% of your contract by working through an umbrella company. If you are considering this route, our sister company Parasol can provide the help and support needed to understand this in more detail.

Benefits of contracting through an umbrella company

• Income Tax and National Insurance contributions are deducted before you receive your salary, with no further taxes to pay
• You will benefit from employment rights such as holiday pay, sick pay, maternity pay and pension contributions

Downsides of contracting through an umbrella company

• You will receive a salary that is subject to full Income Tax deductions and National Insurance contributions
• You are reliant on the umbrella company to collect your money from the client or agent and then to pay it on to you