Choosing a Company Structure, Limited or Umbrella?

Taking that first step and deciding to become a contractor is an exciting time and there are lots of new changes on the horizon. You’re in charge of finding work and managing your own finances, so there’s plenty of challenges ahead to keep you busy.

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Which options are available?

When it comes to choosing how to operate, there are a few options on offer. As a contractor, your two main options are to contract through your own limited company, or through an umbrella company.

Aside from these two structures, did you know that there are other options on offer? We have taken a look at these in more detail, in this guide.

Umbrella company

An umbrella company acts as an employer for contractors working on fixed term contracts.

The main function of an umbrella company is to organise payment for the contractor, deducting Income Tax and National Insurance Contributions before passing on the final figure to the contractor.

  • Joining process: Becoming an employee of a limited company is simple. Once you have found one that you feel comfortable with and suits your needs, the next step is to sign up. You will need information such as your National Insurance number, bank details and proof of identification. The umbrella company may also require you to sign a contract of employment, like one you would sign in permanent employment.
  • Contract length: Umbrella companies tend to be best for those new to contracting, or for contracts lasting only a few months. If you want to see if contracting is for you, umbrella companies give you the perfect opportunity to try it out.
  • Salary: The umbrella company will receive an invoice for the time worked, plus any expenses that have been incurred. Once the necessary deductions (Income Tax, National Insurance Contributions, expenses, margin) have been made, the money is paid to you.
  • Expenses: As an employee of an umbrella company, there are more restrictions compared to contracting through a limited company. If you are subject to supervision, direction or control (SDC), you cannot claim tax relief on travel and subsistence.
  • Tax and National Insurance: Income Tax and National Insurance contributions will be deducted before you receive your wage. The amount you pay depends on your earnings.
  • Responsibility: As an umbrella employee, you will be required to submit regular timesheets with the hours you have worked, as well as your expenses.
  • IR35: If you work through an umbrella company, you will be taxed in the same way as an employee. This means you will have to pay Income Tax and National Insurance before you receive your pay. As you are an employee, you will be seen as being inside IR35.

Limited company

A limited company is a company that has been incorporated at Companies House, and is recognised as a separate entity from its owners.

Although this pathway is slightly more complex due to the incorporation process, it is popular with contractors because of the tax benefits.

  • Joining process: If you don’t already own a limited company, your first step is to form, or incorporate, your limited company. Before starting this process, you need to have a suitable name in mind. Companies House has a company name availability checker to ensure your proposed company name is available. Once you have confirmed your company name, you can then form your limited company. If you are looking to form your limited company, our limited company formation service will get you up to speed in no time at all.
  • Contract length: Limited companies are a good idea if you plan to contract for a longer period, as it is a more tax efficient option in the long term.
  • Salary: When it comes to limited company ownership, you have access to dividends alongside paying yourself a salary. Most limited company directors pay themselves through a blend of salary and dividends.
  • Expenses: As the owner of your limited company, you have the opportunity to claim back on your business expenses. Common business expenses include business mileage, equipment costs, business insurance and accountancy fees.
  • Tax and National Insurance: Once you have incorporated your limited company, you will be contacted by HMRC to register to pay Corporation Tax. This is a total of 19% (until 31st March 2023) of any profits you have made during that financial year. Income Tax is also deducted on any salary you take from your limited company, over the threshold of £12,570 (2022/23). National Insurance payments also apply to the income of limited company directors; however, no National Insurance deductions are made on dividends.
  • Responsibility: Limited company directors have a range of responsibilities, these include keeping company records, filing your accounts and paying Corporation Tax. Failure to meet your responsibilities can lead to serious consequences including being fined or prosecuted.
  • IR35: As a limited company director, your limited company can either fall inside or outside IR35, based on a list of factors. These include control, mutuality of obligation, and the right to substitution.
  • Liability: A huge advantage of trading through a limited company is the financial security, as a limited company is deemed to be a separate legal entity from its owners.

Other business structures

Alongside these two main options, there are other business structures to take note of when starting up. These include the following:

Sole trader

If you run your business on a self-employed, individual basis, you are likely to be seen as a sole trader. Being a sole trader is the easiest way of running a business, but you must register as being self-employed with HMRC.

A downside to this is that your personal and business assets are not separate; if things go wrong your possessions could be at risk.

Partnership

In a partnership, you and your partner share the responsibility for your business. As well as sharing responsibility, you share the profits and each partner pays tax on their share.

You must register with HMRC, stating your company name and nominated business partner.

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How can SJD Accountancy help?


Appointing an accountant can save you time and stress when starting up on your own. If you would like to speak to someone about any of the above information or any other queries you may have, arrange a callback and a member of the team will be in touch.

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