Whether new to contracting or a seasoned professional, there are two options available for creating a payment structure. Either you can create a one-person limited or an umbrella company. Setting yourself up properly minimizes your long-term tax liabilities while maximizing your income and allowing ease of dealing with your potential customers.
It is important to emphasise from the outset that the choice doesn’t affect or influence the IR35 status of the contract or modus operandi of the working arrangements. The choice also wouldn’t influence any HMRC reviews or decisions as to whether the contract falls within the regulations of IR35.
Setting up and running a limited company, where you become a director or shareholder, is the most tax efficient way of working and contains a series of advantages.
First off, in making a decision, the contractor should consider the following three points:
IR35 Status: If your contracts are outside of IR35 then, from a tax point of view, the Limited Company would be the correct option – especially for long term contractors.
Presentation/Status: If you fancy calling yourself the Director then a limited company is the option for you.
Administration: There is more work involved with a limited company, therefore it will require a little bit more of your time. If you are happy to commit 30 minutes a week to running administration of your business then it is best you select a limited company formation. If you are completely adverse to any administration then an Umbrella is most suited to your requirements.
Making the right decision based on your own circumstances and requirements will achieve the most efficient result. There is no “always right” or “always wrong” solution. Both methods will work for you, achieving a similar result but with different working arrangements.
Advantages to Choosing Umbrella
An Umbrella solution is perfect for any first time contractors who require a quick and easy contracting start up. Straightforward and easy to use, all that is required of you is to update your timesheet and paired expense details…then wait to be paid!
An Umbrella solution is ideal for short-term contracts or contracts less than £25,000 per annum. This solution also removes the responsibilities and legal implications of running your own limited company.
The PAYE (Pay As You Earn) umbrella company takes care of all accountancy, administration, taxation and communicating for payment of invoices. All tax and National Insurance is deducted before you receive your money. Therefore you will have no further taxes to pay. Insurance policies are included as part of the service.
An Umbrella is also perfect for those unsure if they are staying in the contracting market. You will have full employee status and entitlement to all statutory employment rights.
There are a couple of advisories to note, however. First off, you will receive a salary that is subject to full PAYE Tax and National Insurance. It’s just like being a permanent member of staff again. Furthermore, you are reliant on the umbrella company to collect your money from the client or agent and then pass it on to you.
Advantages to Choosing A Limited Company
There are numerous advantages to choosing to operate as a limited company. Firstly, it provides the most tax efficient way of working and allows claiming for a wider array of expenses while also giving access to the flat rate VAT scheme.
You also keep control of your financial affairs. You do not have to risk your money with any third party administrator.
Don’t let the thought of running your own business put you off. Running your own business isn’t difficult; simply submit spreadsheets to your accountant covering your time sheets and expenses. Running a limited company is also a great opportunity for tax planning and ideal for contractors with complex financial affairs.
There are wider ranges of tax benefits available, including payments by dividends that attract a lower rate of tax.
Overall, you are your own boss! You’ll have complete control over the company and its operations, as you are the Director. Fancy the sound of that? A limited company is for you!
As with the Umbrella, there are a few cautions to take heed of. A limited company can be costly if you contract for a very short period of time and is not the best way forward on contracts under £25,000 a year. There is also a considerable amount of paperwork to undertake that is involved. Furthermore, as the director of your own company, you will need to keep Companies House informed of all your company’s dealings.
If you are still unsure about which option to chose, speak to an advisory body to discuss your situation in detail.
Article Source: http://www.abcarticledirectory.com
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