It’s a question which every prospective freelancer and contractor asks themselves before making the leap towards a more self-sufficient way of working. Should I trade as a limited company or work via an umbrella company?
Both methods have their supporters, but in this article I will bring the debate back to basics.
“Why work via an umbrella company who will take away much of your earnings, and make you as tax inefficient as you could possibly be? With a limited company you will have more take-home pay, and realise the dream of truly running your own business. And besides it really isn’t as difficult as some would have you believe. More money, more independence, and far greater all-round rewards!” ~ Liam Ted Kompany
“Why work via a limited company and have all the hassle of sorting out your tax payments, dealing with mountains of paperwork, and having the responsibility of every minute detail of running your company? With an umbrella firm they’ll do it all for you; leaving you to just do your day job. Less hassle, less worry, and more time doing the things you want!” ~ U. M. Brella
Essentially, an umbrella company acts like an employer for freelancers and contractors. All you have to do is submit timesheets to the umbrella company who will then invoice the client you’ve been working for. This means that all the paperwork is done for you. You are then paid by the umbrella company as a PAYE employee – minus the umbrella fee. You will also need to submit any expenses to the umbrella company.
People who set up their own limited company have succeeded in creating their own business venture giving them complete control over their finances. Typically small businesses, freelancers and contractors form limited companies. By setting up a limited company you are able to keep the company finances separate from your personal finances. Unlike sole traders, your house isn’t on the line if your company ends up in financial arrears.
The current progression of online automative technology enables many of the time-consuming processes associated with accounting to be dramatically reduced. This has meant that both forming and running a limited company needn’t be the painstaking process it once was. However, you need to ensure you find an online service which does this effectively. And preferably with qualified accountants thrown into the package. Crunch.co.uk is one of the very few services that does just that.
The progression of these online services means that some see the role and relevance of umbrella companies being seriously undermined. After all, if running a limited company is relatively simple then why miss out on the considerable savings by working through an umbrella company?
The future of IR35 ‘disguised employment’ may also affect the future of umbrella companies because if the tax system in the UK is significantly simplified, then running a limited company may become even easier.
Ultimately, umbrella companies remain an effective solution for people who want to contract in the simplest possible manner and are happy to pay for the privilege. They will also continue to be a good option for short-term one-off contracts. But it does seem that limited company account set-ups will be the preferred option for most contractors in the future.
Image by protectorrr ~ cc
