In a high proportion of instances, contractors tend to work via limited companies, with a significant amount preferring (or have no choice) to work through an umbrella company.
In this blog post, we will look at the pros and cons of contracting through an umbrella company, it should arm you with more information to decide whether it is the best choice for your employment situation.
The Pros of Choosing a Contractor Umbrella Company
- A hassle-free way to contract. With none of the administrative or regulatory responsibilities that are associated with running a limited company, umbrella companies do all the administrative and regulation work for you. This way you can just get out and work and see your wage come in.
- If you’re only planning to contract for the short-term, joining an umbrella company is a good choice, as it is quick and easy to do. Whereas setting up a new limited company can take time and involves paperwork to set up.
- No annual self-assessment tax returns to submit unless you have received untaxed income which is unlikely as any umbrella company worth their salt will sort all of this out accurately and properly to avoid any unexpected tax stings.
- You also can continue using your existing personal bank account, whereas if you go down the limited company route you will need to set up a business bank account which adds more hassle and time to the process. This is because as a limited company director, you cannot use your personal account for business transactions, as the limited company is a separate legal entity to you as an individual.
- Easy registration process. All you need to do to join an umbrella company is provide your contract and personal details and they will get you registered and ready for work. Each week or month, you will submit your timesheet(s) to your umbrella company. They then invoice the company you’re contracted to carry out work for. Then payment is made to you via the umbrella company, net of income tax, national insurance, the umbrella fee, and any other deductions i.e. pension contributions.
- Also if you’re new to the world of contracting, joining an umbrella company is a sensible and easy way to get started until you feel ready to set up your own limited company at a later date.
The Cons of Choosing a Contractor Umbrella Company
- If your contract work isn’t under IR35 / Off-Payroll rules when you work via a limited company, there is a tax advantage. This is due to the fact employers’ National Insurance contributions are not payable on dividends, whereas salaried income NICs are payable.
- A limited company has more flexibility with tax-planning opportunities. Options such as splitting shareholdings with a spouse or family member. While also deferring dividend payments until the next tax year, to reduce tax liabilities.
- Control is something that lacks in the contracting world when working via an umbrella company. Whereas a limited company allows you to be fully in control of the day-to-day operations of your business.
- Finding the right umbrella company, as there are still some firms who aren’t fully transparent about take-home pay quotes. The only difference between any quotes should be the margin (the umbrella company fee) they charge. All must deduct the same amount of tax and NIC’s by law.
The above should help give you a more informed picture of whether joining an umbrella company is the right move for you.