If you’re heading into the contractor workforce, it’s important to make sure you make a decision on the best business structure for you to work under. You will have to decide on whether you want to be director of your own limited company, or work as an ‘employee’ for an umbrella company. To help you make the decision and understand more about the benefits of each, check out our guide below:
A limited company is a small business set up by an individual who becomes the company director. As a director, you are responsible for meeting the company’s legal and financial obligations, which means you will have to submit annual accounts to Companies House, run the company and meet HMRC tax deadlines. Most contractors choose to hire a specialist contractor accountant to take on a lot of the work involved with running the company, so they can focus on the service they are providing.
Setting up a limited company is favoured by many down to it being the most tax-efficient way to operate. This works because you pay yourself a basic salary and the remainder is drawn from dividends, which are not subject to National Insurance Contributions. Although, limited companies do still have to pay Corporation Tax on their annual profits and VAT is added to all invoices and repaid to HMRC each quarter, allowing for VAT you may have reclaimed on purchases for the company.
- You will more than likely pay an annual fee to an accountant to deal with company administration
- More tax-efficient
- As a Director you have more legal and financial responsibilities
- Good for working with multiple clients, though not good for short-term contracts
There are now more umbrella companies operating in the UK as the numbers have grown rapidly over the past decade. The structure of an umbrella company works differently to a limited company as you will effectively become an ‘employee’ of the scheme. This means that the client pays the scheme as soon as you have submitted an invoice, and you will then receive a salary after deductions for tax, expenses, National Insurance, the umbrella fee and any other pre-agreed costs. Of course, this means it isn’t as tax-efficient as the limited company route, however it appeals to a lot of people for being less of a hassle compared to the responsibilities of a director role.
Working under an umbrella company might be more beneficial for those who want a taster of the contractor workforce, short-term contractors or those who would prefer less responsibility and administration work.
- You will have to pay a weekly or monthly fee to umbrella company
- Less tax-efficient
- Less control/responsibilities which means less legal duties
- Good for short-term contracts
- Not ideal for working with multiple clients
Check out our guide on the basics to being a contractor, here. If you’re looking for work in the Cyber Security, Business Intelligence & Data Warehousing, Business Transformation, Big Data and Public Sector industries, please contact Cyberteam by emailing email@example.com or call us at our offices in London (+44 (0)207 849 3082) or Leeds (+44 (0)113 398 4070).