If you’re thinking of working as a contractor, then you’ll need to consider whether to open a Limited Company or sign up to an Umbrella Company. These are the only two means by which an employer will pay you through as a contractor. However, both are not the same, therefore, each one has it’s own pros and cons which will be elaborated on below and a brief description of the reality of both.
Limited Company
You are the owner and an employee of this company and other clients i.e. companies hire the services of your company i.e. you for a specific job. Alongside your limited company will be a business bank account which through you be paid for your services.
Pros:
1. The overall wage you take home after deducting taxes is more than what you would have taken through an umbrella company
2. Tax is calculated on your net income (gross income minus work related expenses like travel cost)
3. The possibility of being entitled to other Tax Reliefs that the government allow
Cons:
1. Can be lengthy forming a limited company and opening a business bank account
2. Sole responsibility and liability of submitting Company Tax Returns and Tax Self Assessments
3. More administration required, which in turn consumes more of your time
Umbrella Company
An Umbrella Company is a company owned by someone other than you, through which you register and become like an employee of it. Your wages are paid to your chosen Umbrella Company, who in turn pay you after deducting the tax you owe on it and then submit it to the government for you.
Pros
1. Signing up is pretty simple and far more easier and less time-consuming then opening your own limited company
2. The Umbrella Company calculate and submit to the government the tax you owe on your wage before paying you.
Cons
1. Umbrella Companies charge a fee for using their services.
2. Tax is calculated on your gross income rather than your net income (gross income minus expenses)
3. Not entitled to tax reliefs
The list is not exhaustive but I’ve listed the main pros and cons of each. Moving on to the conclusion, a Limited Company is worth opening if you are planning to be a contractor long-term. On the other hand, signing up to an Umbrella Company is better for short-term contracting.
