So you have decided to contract? No doubt the potential increase for earnings and job flexibility have been big factors in your decision. But there are other things to consider before you step into the highly lucrative world of the contractor. You’ve made the biggest decision, that is to leave full-time employment. You now have one more choice left to make – umbrella or limited company?

While both options have their advantages it is up to you to decide which will benefit you the most.

IR35 considerations

The choice you make will have a significant impact on how you deal with IR35 legislation. IR35 was introduced by the HMRC in order to close a loophole that allowed contractors to avoid paying large tax and National Insurance (NI) deductions.

Choosing an umbrella company (specifically a PAYE umbrella company) will mean that all your earnings are within IR35. This happens because you are technically an employee of the umbrella company which means they will deal with the legislation.

If you choose to set up a limited company you will be responsible for your IR35 calculations. To be outside of IR35 legislation you must prove to the HMRC you are ’self-employed’. Once you have ascertained this it is down to you to declare your earnings. If you think there is a chance that you are within IR35 then you should declare it to be on the safe side.

Paperwork

One of the biggest advantages of an umbrella company is the lack of paperwork and administration. Your company will take care of all of this for you. The only piece of paper work you will regularly have to fill out is your time sheet. Once this is done you can send it to your umbrella company and they will take care of the rest!

Working through a limited company will mean you have to take care of your own paper work. This means designating an amount of time each week to taking care of your administration. Ultimately you are in more control of your own business, however there is a certain amount of extra work that you must factor into your schedule.

Tax

PAYE umbrella companies take care of tax payments and NI deductions for their employees. Once they have received payment from your client they will make the necessary calculations and deductions. You will then receive a payslip detailing this, just like you would if you were a full-time employee. You also won’t have to pay corporation tax if you choose to work through an umbrella company.

As a self-employed contractor you will have to calculate your own tax contributions. As you have now set up your own company you will also have to pay Corporation Tax, this is a levy on your profits. You must register your company with HMRC within three months of starting the business. It may also be beneficial to employ a qualified accountant to help with your tax calculations.

Which is best?

By consulting umbrella company reviews you can help ascertain which is the best company for you. Online forums are also a good place to find out information from contractors about umbrella companies and limited companies. Generally an umbrella company leaves a contractor free to focus on their work whereas a limited company ultimately puts you in more control of your business.