Umbrella - If you’re on a short term contract, earn less than £25k or you’re caught inside IR35, operating through an umbrella may be the best option for you financially. You’ll be taxed as a PAYE employee would, so your NI and Income tax would be deducted at source and sent to HMRC.
As an employee, your umbrella company will typically take care of the paperwork; you’ll just be submitting your timesheet. By operating through a brolly, there are no directorial duties attached or the administrative hassle of paperwork. If you’re looking for simplicity, operating through an umbrella may be for you.
IR35 Reform: It’s worth mentioning the IR35 reform in the public sector which came into force in April 17. The reform means that if you’re working for a public sector body through your limited company, the responsibility for determining IR35 status will lie with the public sector body
Before the reform, the contractor was responsible for determining IR35 status. If found to be caught by IR35, you would be taxed as a PAYE employee would, the same as when operating through an umbrella.
By operating through an umbrella company, you will essentially become an employee which cuts out the step of determining IR35 status. If you’re working on a public sector contract, operating through an umbrella may appear more attractive due to the operational simplicity.
Limited Company - If you’re on a long-term contract, running your contract through a Limited Company can be more financially efficient, giving you more in take-home pay.
You’ll be able to benefit from the Flat Rate VAT Scheme and claim expenses such as travel, subsistence and accommodation. As a limited company contractor, making pension contributions is also a tax efficient way of saving as there’s tax relief on any contributions that you make, subject to the £40,000 annual allowance.
As the director, you’ll take care of the day-to-day running of the business and you’ll be legally responsible for submitting the financial paperwork, including accounting paperwork...which is when a good accountant comes into play.
IR35 Reform: It’s worth noting that the IR35 ‘off-payroll rules’ are set to be extended to the private sector, but this has been delayed until April 2020, as announced in the Autumn Budget statement 18. This will only apply if the private sector body is a medium to large sized business.
Despite disagreement from industry leaders, Philip Hammond said during the announcement,
“Widespread non-compliance also exists in the private sector. So, following our consultation, we will now apply the same changes to private sector organisations as well.
“But after listening carefully to representations made during the consultation, we will delay these changes until April 2020 and we will only apply them to large and medium-sized businesses.”
The reform will mean that if you’re working on a private sector contract, the end client/agency will be responsible for determining IR35 status. Currently, limited company contractors working on a private sector contract are free to determine IR35 status without the interference of the end client/agency.
If you’re caught by IR35, you will be required to pay NI and income tax, increasing the complexity of your accounting. In order to determine the best operating structure, it’s worth calculating your take home pay through both limited and umbrella, taking into account expenses incurred wholly for business use (for limited).
By operating through a limited company, you can maximise take-home pay by tax planning and structuring the way you pay yourself through dividends and/or salary. Your accountant will typically advise you on this.
The thread Accountant recommendation threads inc local requests goes through a list of recommended accountants. It’s worth taking a look at those offering FreeAgent as part of the accountancy package; it really makes life easier when it comes to invoicing and recording expenses.
Then there’s the flexibility and freedom - if that sounds like you, this could be the way to go.