Umbrella Vs Limited

When you embark on a contracting career, the first major decision you’ll have to make is whether to join an umbrella company or set up your own business.

Although both options offer you an escape from traditional employment, there’s a big difference in the amount of responsibility you have to take on. We understand that as a new contractor, it might seem difficult to decide which option is best for you.

This is why Rubicon Pay is on hand to help!  The below outlines the key differences between the two routes – so hopefully this will help give you more information so you can make an informed decision.

Umbrella company

An Umbrella company provides a hassle-free and convenient way to be paid, and this way of contracting became popular after the introduction of IR35 in 2000.

Having chosen your umbrella company, you will become an employee of that company, and they take care of all the administration on your behalf.  You’ll be paid by PAYE (Pay As You Earn) and to meet the rules of ‘continuous’ employment, they must usually pay you for 336 hours of work per year at the minimum wage.

Your Umbrella Company will raise invoices on our behalf and pass the proceeds onto you as a salary, after retaining a “margin” and deducting taxes in line with what you would pay in any other kind of traditional employment.  The “margin” retained by your umbrella company should not be calculated according to what you earn. There is no more work involved, for the umbrella company, if you earn £100 per day or £500 per day.

Compliant umbrellas, such as Rubicon Pay, provide you with a contract of employment. This means you’ll have access to all the rights and benefits given to permanent employees, including holiday, sick and maternity & paternity pay.

You will be able to claim legitimate expenses as long as your end client or agency has agreed in advance to pay for certain rechargeable expenses incurred whist on duty. In this case, providing the expenses were incurred through attending a temporary work address, then your end client or agency would send us these additional funds, and we would pay these to you in full alongside your normal taxable income. However, if these expenses were incurred through attending a single work address for the duration of your assignment, then they would be treated as additional income, and would be taxable in the same way as the rest of your pay.

No compliant umbrella company is able to process non-chargeable expenses for tax relief purposes because of legislation issued by HMRC in April 2016 which considers every contractor working through an umbrella company as being under SDC, unless the contractor can prove otherwise. This brings tax treatment of contractors in line with those of permanent employees, who are unable to claim the costs of ordinary commuting or meals purchased while at work as an expense on their tax returns.

Here’s a brief summary of the benefits you can expect as an umbrella contractor:

  • All legal, employment, tax and contractual obligations taken care of
  • Greater earning power compared to permanent employment
  • Spend far less time and effort on administration duties compared to a company director
  • Get paid quickly, accurately and on time
  • Benefit from employment rights, plus Professional Indemnity and Employers/Public Liability insurances

Limited Company

Whilst Limited company contractors can receive more money than those working with umbrellas, this increased earning power doesn’t come without effort.  You will be classed as self-employed and will be required to operate as an independent business, carrying out and responsible for all the associated administration, such as:

  • Registering as a director of your own company and keeping Companies House informed of your accounts and significant changes to your company
  • Opening a separate business bank account
  • Invoicing your agency or client
  • Ensuring that all documents/tax returns are filed on time
  • Producing detailed accounts, invoicing and VAT records
  • Completing an annual self-assessment tax return
  • Submitting and paying accurate Corporation Tax returns
  • Responding to communications from accountants, HMRC, Companies House and other organisations
  • Paying tax due on any dividends
  • Conducting regular IR35 reviews to ensure you’re on the right side of tax law

However, with the ever evolving discussions regarding IR35, contractors are finding it harder to utilise their own Limited Company in engaging with their suppliers.

IR35 was introduced (1999) to tackle the problem of ‘disguised employment’. This is where organisations engage workers on a self-employed basis and usually through an intermediary, rather than on an employment contract, so they become disguised employees.  Contractors working in the public sector through a personal service company (PSC), such as a limited company, haven’t been able to determine their own IR35 status as of 6 April 2017, and consultation is ongoing in respect of bringing this to the Private Sector as of April 2020.

For public sector workers, this means if their public sector client deems their assignment as being inside IR35, they must inform your recruitment agency or other third party body, who will then make the necessary tax and National Insurance deductions before making payment to your limited company. If you contract directly through the public sector body, the public sector body will make the deductions.

If your assignment is deemed to be inside IR35, you have some options:

  • Continue working through your limited company – you could continue to contract in the public sector through your limited company, and accept the lower take home pay you will receive. You will also no longer be able to claim certain expenses.
  • Negotiate a higher rate – adjusting your rate to make up for the loss in take home pay is an option, although an adjustment that your client will agree to might not make up for the loss.
  • Switch to umbrella – switching to a compliant umbrella company means you won’t have to pay any Corporation Tax or dividend tax on top of paying income tax and employees NI, and you will receive employee benefits unavailable to you when contracting through a limited company.