What is an umbrella company?

Most contractors choose to work in either one of two ways, through a limited company or under an umbrella company. In the following paragraphs we’ll breakdown everything you need to know about umbrella companies and whether or not they are the best option for you.

An introduction to umbrella companies

In a nutshell, contractors are employed directly by the umbrella company. You’ll still get all the benefits of being your own boss, like being able to choose what hours you work, but instead the umbrella company handles invoicing on your behalf and pays you as a PAYE employee.

The advantage of this route is that the paperwork is minimal and you don’t have to submit a tax return as all tax is deducted for you. All you need to do is submit a timesheet to the umbrella company will invoice the client and pay you once they have received the funds.

Umbrella company take home pay

Whilst umbrella companies provide contractors with far less administrative duties, when working under an umbrella company you can typically expect to take home around 60% to 65% of your gross income. In contrast, contractors who choose to work through a limited company can take home 75% to 80% of their gross earnings.

Why so many contractors go limited

With these figures in mind, it is no surprise that thousands of contractors choose to go down the limited company route. The greater take home pay amounts more than outweigh the extra time that is need to focus on administrative duties. Moreover, if you struggle when it comes to keeping on top of paperwork, a good accountant will be able to help and take care of as much or as little of your accountancy needs as you require.

In addition to the higher take home pay amounts; there are a number of other key advantages to choosing to operate through a limited company.

  • Limited liability – This means that if for whatever reason your company cannot keep up to date with it’s debt repayments your personal assets cannot be seized. The debt is in the company’s name and therefore you are considered a separate entity.
  • Claim a wider range of expenses – As a limited company owner you can claim for a far wider range of expenses compared to if you chose to operate under an umbrella company. These can then be offset against your turnover to reduce your overall tax liability.
  • Greater opportunities for tax planning – Our expert accountants will be able to tell you about these in more detail but there are wealth of tax planning opportunities that limited company owners can take advantage of.
  • Benefit from the Flat Rate Scheme – As a limited company owner you will be able to register for the Flat Rate VAT Scheme. In a nutshell the Flat Rate Scheme allows you to charge VAT at the standard rate of 20% but pay it back to HMRC at a reduced rate. Essentially, you can profit from charging VAT.
  • Given more credibility – Some companies, particularly larger corporations, will only work with limited companies. As a result, if you think that you could end up working with such companies, it is well worth considering going down the limited company route. The last thing you want is to miss out on potentially lucrative contracts due to the structure of your business.

Our fixed fee service

At Contractor Accountants Online our team of qualified accountants have the knowledge and experience to manage all of your accountancy needs.

We have a wealth of experience in helping contractors just like you get to grips with the complex world of tax and accountancy. Our comprehensive, fixed-fee package is just £55 per month and we’ll get your limited company incorporated within 24 hours.

Unlike many other contractor accountants, we offer a fully transparent service with no hidden extras, for just £55 per month you will receive:

  • Annual accounts submission
  • Management information
  • Corporation tax calculations and submissions
  • Monthly payroll and RTI returns
  • Quarterly VAT returns
  • Annual returns for Companies House
  • Personal tax return for the director
  • Manage your finances online with FreeAgent

If you have any questions about our service, call our expert accountants on 020 7481 4743 and we will be happy to help.

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