Contractors generally have two main payment options: operating through an umbrella company or setting up a limited company. For those new to contracting, this decision can be tricky, with each option offering different benefits and downsides.
Choosing the limited company route usually means more tax advantages and limited liability for shareholders. This path is appealing for those planning to contract in the long term. However, it involves a lot of paperwork, like tracking payments and calculating taxes.
On the other hand, if you go with an umbrella company, you don’t have to deal with these administrative tasks. The umbrella company becomes your employer, handling the paperwork and ensuring taxes are paid correctly. The downside is you won’t get the extra tax benefits that come with a limited company.
When deciding between these options, you should consider other factors as well:
– Paperwork Tolerance: Running a limited company means a lot of paperwork, such as filing accounts and invoicing. If you’re okay with this, a limited company might be the way to go. If not, an umbrella company may be better. You could also hire an accountant to manage the paperwork while you enjoy the benefits of a limited company.
– Contract Length: For short-term contracts, setting up and winding down a limited company might not be worth the effort, making an umbrella company more practical. But for long-term contracts, a personal services company could be more beneficial.
– IR35 Regulations: Your decision could depend on whether your contracts fall inside or outside IR35 regulations. To maximize tax benefits with a limited company, your contracts should ideally fall outside these rules. If they do, a limited company might be more financially sensible.
– Control: If you want complete control over your business affairs, a limited company is a better choice.
If you’re still unsure after considering these points, you might want to start with an umbrella company and switch to a limited company later if needed. Deciding between these two options isn’t easy, so thorough research and professional advice are essential for making the right choice.