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Limited Company vs Umbrella

If you are thinking about moving to the dark side, stepping out into the wild world of contracting or freelancing after you enjoyed the security of permanent employment, the best piece of advice would be the take a moment to reflect before you throw yourself in the deep end trying to scramble to safe waters.


Your ultimate goal is to set up a successful business that will minimise long term tax liabilities, whilst maximising your income potential and offering a range of products/services that meets your customer’s needs and requirements.


In short, you have two options available to you; to set up a limited company or to operate under an umbrella company.  We will explore this in more detail shortly.


If you dream of being a director of your own company then setting up your company as a limited company would be the most tax efficient option, plus it offers a large number of benefits.


You will have the ability to reclaim a large and wide range of expenses which can include but not limited to equipment, accountancy fees and software costs.  Other tax benefits include having access to the flat rate scheme which in essence enables you to keep hold of some of the VAT you receive from your customers.  But more importantly and probably the reason you are setting up your own business, you will have complete control of all your financial affairs.  It is your responsibility to manage all of your financial matters.


There is a misconception that running a business can be difficult at times, but this is what the experts are here for.  With the assistance of a professional and experienced qualified accountant, it need not be challenging.


If you are still worrying about managing your financials and would rather act as a contractor, leave the paperwork to someone else, instead producing regular timesheets. The services of an umbrella company may be the preferred option for you.


If you think about the purpose of an umbrella, it is there to protect you and provide cover when you need it.  This is exactly what an umbrella company will do for you, just that there is no rain in sight!  You would enter into a contract and effectively be a PAYE employee similar to an employee as you pass the responsibility of paperwork and collection of any money due from customers to the umbrella company.


This is accepted as being a simple to use system but offering very little benefit for the individual concerned in regards to tax liabilities and can in fact cost more due to service fees of up to 9% that can be levied by the umbrella company.  If you compare this to the cost of an accountant providing a service to a limited company you can expect to pay a fixed fee regardless of turnover.


If you are still considering using an umbrella company, ask yourself three key questions:


What will the charge be?


Is there a minimum charge?


What accountancy/tax qualifications do they hold?


If your ultimate goal is to maximise your income then forming a limited company should be the favourable option, typically you can be taking home up to 75-80% of your earnings, compared to an umbrella company which would potentially equate to 60-65% of your earnings.  


Ultimately the choice is an individual one, but before you make a decision consider speaking to an accountant.

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