Limited Company or Umbrella

Once you have made the decision to become a Contractor, you will need to decide whether to operate either through your own limited company or as an employee of an umbrella company. Each has advantages.

PAYE Umbrella

You become an employee of an umbrella company operated by a third party and will need to send time-sheets and expense claims to them. The umbrella will then invoice your client and you will be paid as a PAYE employee less a fee from the umbrella company. The main benefits of this scheme are:

• They are simple to set up and run as you do not have to create a new company and only need to complete a timesheet and record your expenses.  Therefore they are ideal if you are only operating on a one-off short term contract or if you want to eliminate any issues around IR35 -find out all about IR35 here.
• Any tax and NI due will be deducted before you receive your money, so you don’t have to worry about tax any more than a normal employee.

The main drawbacks are:

• It is an expensive way of operating as you will pay tax and NI in the same way as when you were an employee.
• You are relying on a third party to administer your paperwork and to pay you.

Limited Company

Working through your own limited company means you will generally pay less tax but you will have to undertake some additional administration. The main benefits are:

• This is the most tax efficient way of operating as a Contractor, subject to the IR35 legislation - find out all about IR35 here.
• There is the opportunity to set a wide range of expenses against income for tax purposes. Learn more here about the expenses you can claim.
• You will be able to access the Flat Rate VAT scheme.
• Unlike using a third party umbrella scheme, you will remain in control of your financial affairs and will not have to rely on someone else.
• Married contractors may be able to gain tax advantages through careful structuring of the shares in the company.

The key drawbacks are:

• You will need to undertake some record keeping and paperwork although this is relatively minor.
• Due to the set up and close down costs involved, it is not really cost effective if you only plan to contract for a very short period of time.

Monahans have a dedicated team of specialists looking after the affairs of Contractors and can advise on all aspects of becoming a Contractor. Or if you are already a Contractor and need an Accountant to help you manage your affairs as efficiently and profitably as possible, we have the knowledge and expertise to do just that.

Contact our Contractor Team via this link if you would like a friendly chat about how we could help you.

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