Self-employed sub-contractors may come across other subbies who work through a limited company or an umbrella company. You may not be familiar with what limited companies or umbrella companies are in practical terms. In this blog, we will consider both of these types of companies to help you decide if one might be appropriate for you.
A limited company is a legal entity that is viewed, in the eyes of the law, as being an entirely separate organisation from yourself. As it is own person, it must prepare accounts, file them with Companies House and file tax returns with the Revenue and pay “corporation tax” (the company equivalent of self-assessment tax)
Limited company pros:-
- providing you are not required to give a personal guarantee, company debt is separated from you, meaning your personal assets are safe;
- limited companies are well-established legal entities, the tax treatment of profits is entrenched in law and many, many people use them;
- operating a limited company can help your business appear more prestigious;
- tax savings can be obtained, primarily because profits are paid out as dividends to you as the shareholder, and there is no National Insurance to pay on dividends.
Limited company cons:-
- there are many laws to follow as regards how you operate your company, maintaining records and paperwork that you may find onerous;
- the year end accounts are more complicated, and this could result in higher accountancy bills;
- for optimum tax saving, you would need to operate a payroll system and either file monthly returns on-line with the Revenue or pay a third party to do so;
- You may find yourself having to pay the corporation tax before receiving a refund of the CIS tax. Unlike for sole-traders, the two are not automatically set off by the Revenue;
- there are penalties for filing accounts and tax returns late.
An umbrella company is an existing organisation set up by a third party, and you become an employee of that company. You submit time-sheets to the umbrella company and your contractor is invoiced by the umbrella company, who pay you the earnings as if you were an employee. The umbrella company deducts an admin fee.
Umbrella company pros:-
- the umbrella company manages all of your paperwork and invoicing, which saves you time and hassle;
- the umbrella company deals with all of your tax and National Insurance, so you do not need to save up any tax at the year end;
- if all of your work during a tax year is via an umbrella company, you are not self-employed and, therefore, don’t need to complete a self-assessment tax return (providing you inform the Revenue).
Umbrella company cons:-
- you will most likely receive less of your earnings than if you worked via a limited company, due to the national insurance and umbrella company’s admin fee;
- some umbrella companies charge considerable (and obligatory) administrative fees;
- Some umbrella companies use tax loopholes to reduce their employees earnings. Once these gaps are closed by the Revenue, you may find yourself considerably out of pocket.
You might find that some contractors will only take you on if you agree to be paid through an umbrella company. Otherwise, if you can choose whether or not to use an umbrella or limited company, you will probably find that in the long-run, a limited company is cheaper tax-wise. Before setting up a limited company, however, it is imperative you seek professional advice to ensure a limited company is appropriate to your particular circumstances.