Limited company or contractor umbrella company? If you are new to contracting, you have two main options on your business structure:

• contracting under an umbrella company for less money but an easier time, or
• starting a company to keep more of your money but at the cost of greater hassle.

In this article, the Burton Beavan team will explain why some contractors choose to use umbrella companies and how, if you choose, we can help you earn more money through a limited company.

Contractor umbrella company – what is an umbrella company?

If you choose to work for an umbrella company, you will essentially become the umbrella company’s employee. The way it works is: you win a contract from a client, complete (part of) the contract, your umbrella company issues the invoice and then they pay you your wage. This wage is subject to both PAYE and NI contributions.

All in all, you will earn less if you choose to work with an umbrella company with the average take home pay being roughly 65% of your original contract worth.

Contractor umbrella company – what are the benefits?

Umbrella companies can take out much of the stress of being a contractor. You won’t need to deal with wrestle with mountains of paperwork – a big saving on your time, energy, and sanity. All of your pay is handled accurately and you’ll always get paid on time – something that very few contractors using a limited company vehicle (sometimes called a Personal Services Company) can say.

Umbrella companies are a good way to test the waters of contracting before you form your own limited company. It can provide a stable, easy way to start building a network of clients so that you aren’t stuck for work in the future.

Because these companies are an agency, they can also provide you with advice and support if you are ever unsure about your work. Typically, umbrella companies operate within a single industry so they will be experienced in the kinds of contracts that you will be dealing with. This can be very helpful when you are finding your feet as a freelancer because you will have somebody to ask if a contract doesn’t look up to scratch.

Contractor umbrella company – what are the disadvantages?

First and foremost, you won’t earn as much as you would if you had your own company. This is because you have to pay the umbrella company a fee for each contract you complete with them. Contracting in any industry can be very good financially but this takes away some of the rewards of your hard work.

Working under an umbrella company doesn’t have the same level of tax benefits as owning your own limited company does either. Not only do you have the previous taxes to think about, but you will also not have the ability to take a salary/dividend split, which can potentially save you thousands of pounds on your tax bill.

So what is the alternative to working for an umbrella company?

Contractor umbrella company – forming a limited company

When it comes to setting up a limited company in the UK, it can be done in a matter of days, and for a very low cost. Once you have your own company, you can then keep much more of what you earn contracting (after the taxman takes his cut for corporation tax, of course). A contractor using a limited company may keep well in excess of 80% of what they invoice personally (by being paid a mixture of salary and dividends).

Speaking of taxes, you will also be able to claim many more business expenses that you incur while completing the contract. There will be paperwork, but that’s nothing a professional accountant can’t handle. Speaking of which…

Contractor umbrella company – we can help

Let’s look at your actual or projected earnings from contracting – we’ll then work real-life examples of the amount of money you could personally earn as a contractor using either of the methods above. Call us today on 01606 333900 or email hello@burtonbeavan.co.uk