Upon deciding to fly the employee nest on a venture of self-employment, your next step necessitates a choice of becoming a Limited Company or operating under an Umbrella Company.
Reasons for becoming a contractor will blatantly vary depending on the individual, but these are the reasons that often dictate which choice is made.
As an example, if somebody chose to become self-employed in order to accommodate a more efficient tax bracket, setting up a Limited Company would be the more sufficient option.
Setting up a Limited Company denotes complete control of your business and bank account. This sounds great, being your own boss and operating however you desire, but with the perks come the burdensome administration duties such as paper work.
Operating under an Umbrella company eliminates this encumbrance. You submit time-sheets to the umbrella who will invoice and chase up the client you have a contract for service with. That is the extent of your efforts.
All of your tax and National Insurance are deducted before you get paid, so there are no further taxes for you to pay, though the umbrellas do charge a fee to be used.
Typically, individuals operating under an umbrella company can expect to take home around 60%-65% of their pay, whereas a Limited Company could take 75%-80%.
In addition, self-employed individuals opting to operate under an umbrella will not be the subject of the HMRC magnifying glass regarding IR35.
Preserving immunity from the torrential downpour of the legislation under an umbrella company is a big incentive of this option of employment.
As you would be essentially seen as an employee of the umbrella, you wouldn’t be under any threat of an IR35 investigation.
On the other hand, Limited Companies are easy victims for a predatory HMRC.
If your contract or working practices are found to not be compliant with the legislation’s rules, you will certainly wish you could run for the cover of an umbrella company.
Ultimately, there are many advantages and disadvantages of setting up a Limited Company or operating under an Umbrella Company. In the end, the decision can only be made by the individual making the independent professional transit based on their own agendas and objectives.