Advantages of an Umbrella company
Discussion
mattyboy101 said:
I've considered this route before, but wondered at what point it becomes worthwhile doing, and what sort of difference will it make?
I just get downhearted looking at the figures in the deductions column on my payslip
I just get downhearted looking at the figures in the deductions column on my payslip
Skim reading the newsletter from the company that provides me with a composite (umbrella), the last budget speach featured a pretty direct statement that they are going to be coming after such companies and you really ought to consider setting up your own limited company.
The acountants will have details to hand no doubt.
Advantages over what?
I think umbrella companies are going to be far less attractive from April onwards - particularly those "umbrellas" which have been playing extremely fast and loose with the tax regulations. Indeed, it is those less than ethical umbrellas companies who have essentially ruined the concept.
Running your own limited company is probably the better option now - being mindful of IR35 implications if appropriate.
If you intend to run TWO (or more) "trades" through your limited company you do need to be mindful of the necessity to separately disclose the separate trading activities and possible other tax implications.
There is nothing wrong with a limited company having more than one trading activity (lots of companies do) but there are some additional reporting and tax requirements.
I think umbrella companies are going to be far less attractive from April onwards - particularly those "umbrellas" which have been playing extremely fast and loose with the tax regulations. Indeed, it is those less than ethical umbrellas companies who have essentially ruined the concept.
Running your own limited company is probably the better option now - being mindful of IR35 implications if appropriate.
If you intend to run TWO (or more) "trades" through your limited company you do need to be mindful of the necessity to separately disclose the separate trading activities and possible other tax implications.
There is nothing wrong with a limited company having more than one trading activity (lots of companies do) but there are some additional reporting and tax requirements.
Say if you had the option of taking a £30k salary either as a direct employee, or as a contractor - what would you end up with?
I know roughly it would be £22k through PAYE, and obviously it depends on the individual, but what could you end up through a Ltd as the MD?
Obviously ignoring the benefits of being an employee (security etc).
I know roughly it would be £22k through PAYE, and obviously it depends on the individual, but what could you end up through a Ltd as the MD?
Obviously ignoring the benefits of being an employee (security etc).
mattyboy101 said:
Say if you had the option of taking a £30k salary either as a direct employee, or as a contractor - what would you end up with?
I know roughly it would be £22k through PAYE, and obviously it depends on the individual, but what could you end up through a Ltd as the MD?
Obviously ignoring the benefits of being an employee (security etc).
I know roughly it would be £22k through PAYE, and obviously it depends on the individual, but what could you end up through a Ltd as the MD?
Obviously ignoring the benefits of being an employee (security etc).
£22k net out of £30k gross through PAYE would be only 27% tax. That seems a bit low on the overall tax take to me.
That's what the calculator on www.listentotaxman.com/ gave me
matty
Too many prermuatations to answer simply -
Contractor - could mean a "temporary" employee - which means the tax and NI would be the same as a full time employee
contractor - could be an agency worker i.e. you are an employee working for an agency rather than the "main" company. In those circumstances, the agency would deduct the PAYE /NI in the normal way at the normal levels
contractor - self-employed individual.
Not that common for contractors but still possible in some circumstances. Taxed as a self employed sole trader under Self Assessment. Tax somewhat less than under PAYE. Class 2 NI due at ridiculously low weekly levels but annual Class 4 NI charged at 8% of "taxable" profits exceeding the annual NI limits
contractor - through your own limited company.
This can be very advantageous from a tax point of view. Mainly because directors/shareholders of their own companies have the ability to pay themselves by means of dividends as well as or instead of salaries. Dividends attract NO tax at all until the individual exceeds his/her Higher Rate Tax threshold for the year (and then they are taxed at 32.5% rather than 40%) and dividends are not chargeable to NI.
However, if a company's contracts fall within the IR35 regime, the normal PAYE and Class 1 NI rates are applied to the company's income derived from those contracts and the advanatge of dividend payments is wiped out.
Contractor - Umbrella Company
A half-way house between an "agency" and a personal "limited company".
Some umbrellas act like normal agencies and pay simple wages to their "contractors". The Revenue are not concerned about this type of operation as the PAYE and NI paid over to them is not much different to what they would get from the individual as a normal employee or through the IR35 calculations.
What the Revenue are very concerned about is the way some umbrella companies have (in their eyes) being abusing the system by making the "employeees" non-voting shareholders of the umbrella company and paying them dividends instead. I have seen one situation where the umbrella company made a contractor's MOTHER a shareholder as well - so they could split his income between two people!
If it can be worked in your personal circumstances, I always think that the Owner Managed Personal Limited Company route is the most tax effective option.
Too many prermuatations to answer simply -
Contractor - could mean a "temporary" employee - which means the tax and NI would be the same as a full time employee
contractor - could be an agency worker i.e. you are an employee working for an agency rather than the "main" company. In those circumstances, the agency would deduct the PAYE /NI in the normal way at the normal levels
contractor - self-employed individual.
Not that common for contractors but still possible in some circumstances. Taxed as a self employed sole trader under Self Assessment. Tax somewhat less than under PAYE. Class 2 NI due at ridiculously low weekly levels but annual Class 4 NI charged at 8% of "taxable" profits exceeding the annual NI limits
contractor - through your own limited company.
This can be very advantageous from a tax point of view. Mainly because directors/shareholders of their own companies have the ability to pay themselves by means of dividends as well as or instead of salaries. Dividends attract NO tax at all until the individual exceeds his/her Higher Rate Tax threshold for the year (and then they are taxed at 32.5% rather than 40%) and dividends are not chargeable to NI.
However, if a company's contracts fall within the IR35 regime, the normal PAYE and Class 1 NI rates are applied to the company's income derived from those contracts and the advanatge of dividend payments is wiped out.
Contractor - Umbrella Company
A half-way house between an "agency" and a personal "limited company".
Some umbrellas act like normal agencies and pay simple wages to their "contractors". The Revenue are not concerned about this type of operation as the PAYE and NI paid over to them is not much different to what they would get from the individual as a normal employee or through the IR35 calculations.
What the Revenue are very concerned about is the way some umbrella companies have (in their eyes) being abusing the system by making the "employeees" non-voting shareholders of the umbrella company and paying them dividends instead. I have seen one situation where the umbrella company made a contractor's MOTHER a shareholder as well - so they could split his income between two people!
If it can be worked in your personal circumstances, I always think that the Owner Managed Personal Limited Company route is the most tax effective option.
Thanks for taking the time to answer that Eric, under what circumstances would you fall under the IR35 guidelines?
I would be working as a consultant/freelance surveyor for a major construction company. Probably quite a long term contract/arrangement.
One of the guys here has been doing so for the past 20 odd years, so job security isnt too much of a concern.
I would be working as a consultant/freelance surveyor for a major construction company. Probably quite a long term contract/arrangement.
One of the guys here has been doing so for the past 20 odd years, so job security isnt too much of a concern.
The expression "long term" would immediately put you into a high exposure to IR35.
IR35 kicks in when it is obvious that your limited company is purely there to act as an intermediary between you and the "employer". Without the compoany, the "employer" would have to take you on as a normal employee.
Getting a tightly worded contract will go a long way to reducing youir exposure to IR35 BUT (and it's a very big "but" ) the wording in the contract can only go so far. If the actuality of your relationship with the "employer" shows that some of the IR35 proof clauses in the contract are not being adhered to, then the Revenue will apply IR35.
In other words, "substance over form" is what counts here.
If you should have applied IR35 but didn't and you are subsequently found out - the Revenue will seek the backlog of unpaid tax and Class 1 NI (employee's AND employer's) - and all from YOU.
IR35 kicks in when it is obvious that your limited company is purely there to act as an intermediary between you and the "employer". Without the compoany, the "employer" would have to take you on as a normal employee.
Getting a tightly worded contract will go a long way to reducing youir exposure to IR35 BUT (and it's a very big "but" ) the wording in the contract can only go so far. If the actuality of your relationship with the "employer" shows that some of the IR35 proof clauses in the contract are not being adhered to, then the Revenue will apply IR35.
In other words, "substance over form" is what counts here.
If you should have applied IR35 but didn't and you are subsequently found out - the Revenue will seek the backlog of unpaid tax and Class 1 NI (employee's AND employer's) - and all from YOU.
Edited by Eric Mc on Thursday 4th January 12:38
Gassing Station | Business | Top of Page | What's New | My Stuff