The differences between limited and umbrella take home pay

Without a doubt the main appeal of contracting is the opportunity to earn more than a permanent employee carrying out a similar role. With this in mind, it is no surprise that one of the most common questions we get asked is whether someone should trade as a limited company or through an umbrella company.

The primary focus is on the difference in take home pay between the two routes, and the main savings with a limited company over an umbrella company are National Insurance and the Flat Rate VAT Scheme.

We are experts in contractor accountancy and offer a fixed-fee package for just £55 per month. To find out more about our comprehensive service call our approachable accountants on 020 7481 4743.

National Insurance savings with a limited company

If you contract through an umbrella company you are responsible for paying both employees and employers national insurance on your salary. Employers NI is 13.8% of your salary and employees is 12% for the first £797 a week and then 1% thereafter.

To give you an example, if you are on a contract of £350 per day, you would pay around £300 per week in National Insurance if you were to work through an umbrella company. However, if you were to opt to work through a limited company, this figure would be more like £30.

When you take the above into account you can already begin to see the overwhelming financial benefits that come hand in hand with working through a limited company.

Savings through the Flat Rate VAT Scheme

The Flat Rate VAT Scheme was introduce by HMRC to simplify taxes. As a contractor, you will be able to charge VAT on your invoices at the standard rate of 20%, but pay it back to HMRC at a reduced rate, therefore enabling you to profit from charging VAT.

The rate at which you pay VAT back to HMRC under the scheme is known as a flat rate and it depends on which industry you work in. As an example, IT Contractors have a flat rate of 14.5%, so they will charge vat at 20% but only pay it to HMRC at a rate of 14.5%.

Using this example, if you work a 45-week working year and are hired on a £350 per day contract, your additional income would £2,992.50 per year.

In addition to NI and the Flat Rate Scheme you’ll also be able to generate an income through earning interest on savings (money you will have set aside to cover your tax).

Starting your limited company

As part of our £55 per month contractor accountancy package we will set up your limited company for FREE and ensure that you are registered for VAT.

Unlike many other accountants, we offer an all-inclusive, fully transparent packages that includes:

  • Completion of annual accounts
  • Management information
  • Corporation tax calculations and submissions
  • Quarterly VAT returns
  • Access to FreeAgent
  • Personal tax return for the director
  • Monthly payroll and RTI returns

You’ll also have the opportunity to manage your financial affairs online with FreeAgent. We understand that you want to keep things as simple as possible and FreeAgent can help to greatly reduce the amount of time you need to spend on your administrative duties.

If you have any questions about contracting or would like to find out more about our low cost contractor accountancy package, call our friendly team on 020 7481 4743.

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