Limited or umbrella company?

Setting up your own Limited Company, where you are the director / shareholder, is the most tax efficient solution for contractors, however it does have its drawbacks. The largest being the time invested into running your affairs properly and legally. Unlike with an Umbrella Company, operating with your own limited company requires far more paper work. Employing a good accountant certainly reduces the pressure and workload, whilst keeping costs to a minimum, note that there are many specialist accounting firms catering for contractors across various industry sectors.

Setting up a Limited Company takes a few day, you’ll need to register a name with Companies House and should take no more than a week. You will also need a business banking account, available from almost all high street banks. This enables you to work efficiently through your own Limited Company. Running your own Limited Company puts you in control of your finances, you’ll be responsible for collecting payments (after submission of an invoice) and be able to pay yourself a salary, opting to keep some funds within your company’s account. This, however, does make you liable to ensure you pay the necessary taxes, both company relates and person tax liabilities. Your accountant will be able to advise you.

One of the advantages of running your own company, are you expense entitlements. A much wider range of expenses are available to contractors and as long as all statutory requirements are followed, you’ll be able to claim legitimate business related expenses. These are usually receipted and, along with you account books, are verified by your account for tax purposes and liabilities.

A major factor deterring many contractors from their own Limited Company is that of red tape. It’s important to understand the process involved and the extra responsibilities attached. Bookkeeping, collecting payments, recording all expenses and paying taxes are just a few of the drawbacks, however if done efficiently, contractors stand to gain substantial benefits, namely with reduced tax liabilities. Contractors should also note that there are some limitations on those who can legally run their own Limited Company, especially those on Working Holiday VISA’s.

By contrast Umbrella Companies have far fewer restrictions and anyone can work through one, providing you’re not on the client or agents payroll (this would make you a permanent employee). Bar the weekly or monthly timesheet and expense claim submission, the contractor is required to do little else. With the JBT PAYE Umbrella, we take care of all client / agent invoicing and offer Pay Guarantee, so that you get paid on time every month, see the JBT Contractors page.

Most contractors, especially first time contracts would rather opt for an Umbrella Company, because of the longer term commitments needed to open and run your own Limited Company. Closing a Limited Company does require some additional time and incurs extra costs, for this reason if you’re unsure of what options best for you, an Umbrella is usually the better of the two.