Sole Trader or Umbrella

[djones123]

I am in full time employment and got a six month opportunity to work on a project as a contractor. I will be spending few hours working on the project in the evening.

I can be a sole trader or get paid through a umbrella company. Which option is better in my situation ?

[acd80]

djones123 said:

I am in full time employment and got a six month opportunity to work on a project as a contractor. I will be spending few hours working on the project in the evening.

I can be a sole trader or get paid through a umbrella company. Which option is better in my situation ?

By sole trader, you mean Ltd company, right? No respectable place would let you near their projects without the appropriate insurance etc. The problem is that it's only for 6 months - is there any possibility of keeping this side hustle going beyond the 6 month period?

I'd seek independent financial advice on it but if you go through an umbrella company, you will get taxed on top of your normal salary but if you go through it as a Ltd company, you can keep that money in the business plus I'm sure you'd need a new company laptop and mobile phone for work purposes - they can be an allowable expense but be wary of the 6 month only period.

[djones123]

acd80 said:

By sole trader, you mean Ltd company, right? No respectable place would let you near their projects without the appropriate insurance etc. The problem is that it's only for 6 months - is there any possibility of keeping this side hustle going beyond the 6 month period?

I'd seek independent financial advice on it but if you go through an umbrella company, you will get taxed on top of your normal salary but if you go through it as a Ltd company, you can keep that money in the business plus I'm sure you'd need a new company laptop and mobile phone for work purposes - they can be an allowable expense but be wary of the 6 month only period.

Is Sole Trader same as Ltd ? I thought under sole trader company will pay all my taxes?

This contract can be extended.

[Mr Pointy]

acd80 said:

djones123 said:

I am in full time employment and got a six month opportunity to work on a project as a contractor. I will be spending few hours working on the project in the evening.

I can be a sole trader or get paid through a umbrella company. Which option is better in my situation?

By sole trader, you mean Ltd company, right? No respectable place would let you near their projects without the appropriate insurance etc. The problem is that it's only for 6 months - is there any possibility of keeping this side hustle going beyond the 6 month period?

I'd seek independent financial advice on it but if you go through an umbrella company, you will get taxed on top of your normal salary but if you go through it as a Ltd company, you can keep that money in the business plus I'm sure you'd need a new company laptop and mobile phone for work purposes - they can be an allowable expense but be wary of the 6 month only period.

Why do you think a ST can't carry just as much insurance as a PSC? I used to have £2m PI & £5m PL when I ran as a a ST for 20 years.

To the OP: if this is only going to be for six months & your client is happy for you to do so then working as a ST is quite straighforward, although you do need to put a few things in place:

Register with HMRC
Insurances
VAT - if you will be over the threshold
Clearance from your employer (not your client)

For a start.

[Mr Pointy]

djones123 said:

Is Sole Trader same as Ltd ? I thought under sole trader company will pay all my taxes?

This contract can be extended.

You need to do some research - & start off by finding out if your client will accept to operating as a Sole Trader or insists you work via a Personal Services Company (what most refer to as being a Ltd Company).

[Eric Mc]

A "sole trader" is most definitely NOT a limited company.

An individual carrying out a self employed business under their own name is a sole trader. A sole trader pays INCOME TAX and Class 4 National Insurance on their net business profits. They also pay Class 2 National Insurance on a fixed basis (not dependent on their profits).

A limited company is a separate legal entity set up by an individual or a group of individuals through which they wish to run a business. Because it is a separate legal entity to the individuals, the liability of the individuals regarding debts in the name of the company is "limited" (hence the title). Also, the company pays tax on ITS profits in the form of Corporation Tax.

The individuals who own the company (the shareholders) can withdraw personal income from the company in the form of dividends. They will pay Income Tax on the dividends (but not National Insurance).

The people who manage the company are called "Directors" and they are paid income out of the company in the form of salary. Salaries are taxed, by and large, the same way as they are for ordinary employees - being subject to PAYE and Class 1 National Insurance (including Employer's NI).

In small companies, the directors and the shareholders are often the same people, so they can "mix and match" their personal income from the company in the form of a combination of dividends and salaries.

[djones123]

I have been asked to get my employment status from the following link;

https://www.gov.uk/guidance/check-employment-statu...

They also mentioned that "regardless of whether you are a Sole Trader or Ltd Co we will probably end up deducting the taxes from your invoices".

I asked them what detail do they require for me to work as a sole trader , they said just my address. If they are going to pay my taxes then they would need my NI and other details.

I think client is confused about sole trader and Ltd.

Edited by djones123 on Thursday 24th September 14:38

[Mr Pointy]

djones123 said:

I have been asked to get my employment status from the following link;

https://www.gov.uk/guidance/check-employment-statu...

They also mentioned that "regardless of whether you are a Sole Trader or Ltd Co we will probably end up deducting the taxes from your invoices".

I asked them what detail do they require for me to work as a sole trader , they said just my address. If they are going to pay my taxes then they would need my NI and other details.

I think client is confused about sole trader and Ltd.

They sound like a right shower. As far as I can see that link is to the IR35 employment status tool which is a whole other can of worms applicable to PSCs, which is why working as a ST can be advantageous.

If they will accept you working as a ST then they should definately not be deducting either income tax or NI.

[djones123]

Mr Pointy said:

If they will accept you working as a ST then they should definately not be deducting either income tax or NI.

Exactly.

I went through that link with the client account's team and status is 'Undetermined'. They will come back to me on this later.

Is sole trader still a better option as compare to umbrella company ?

[Mr Pointy]

djones123 said:

Is sole trader still a better option as compare to umbrella company?

Personally I would say yes, given that it is only for 6 months (I realise you have said it may be extended) & presumably you will still be PAYE with your current employer. It's not difficult to set up as a ST & you can use your exsting bank accounts & the like. I used a different credit card for business spending which made it very easy to keep records but if you're not buying much then there probably isn't any point. You'll need to advise HMRC within a short time & register for Self-Assessment.

https://www.gov.uk/set-up-self-employed

It would be wise to find a local accountant used to dealing with small businesses even if you only pay for a couple of meetings to make sure you are doing things correctly. Record keeping shouldn't be difficult & can probably be done on an Excel spreadsheet. However, there is something called Making Tax Digital being implemented which you may well get caught by: Eric Mc may post more on this.

If it all goes well there's nothing to stop you setting up a PSC later & changing to trading through that.

[djones123]

Mr Pointy said:

Personally I would say yes, given that it is only for 6 months (I realise you have said it may be extended) & presumably you will still be PAYE with your current employer. It's not difficult to set up as a ST & you can use your exsting bank accounts & the like. I used a different credit card for business spending which made it very easy to keep records but if you're not buying much then there probably isn't any point. You'll need to advise HMRC within a short time & register for Self-Assessment.

https://www.gov.uk/set-up-self-employed

It would be wise to find a local accountant used to dealing with small businesses even if you only pay for a couple of meetings to make sure you are doing things correctly. Record keeping shouldn't be difficult & can probably be done on an Excel spreadsheet. However, there is something called Making Tax Digital being implemented which you may well get caught by: Eric Mc may post more on this.

If it all goes well there's nothing to stop you setting up a PSC later & changing to trading through that.

New client told me that with sole trade option, they will pay my taxes to HRMC and i will have to do the self assessment at the end of the year. I am bit confused, i thought being a sole trader i am supposed to pay all taxes by doing self assessment. ....

[acd80]

Mr Pointy said:

Why do you think a ST can't carry just as much insurance as a PSC? I used to have £2m PI & £5m PL when I ran as a a ST for 20 years.

I said appropriate insurance etc - it's not just insurance. A lot of organisations will not engage with sole traders - only Ltd companies. I don't make the rules.

It's irrelevant anyway as the end client want to deduct taxes either way. That screams 'walk away' to me. But that's just my opinion. The OP should seek expert advice and not just random people on the internet.

[LukeBrown66]

lTD is always best

Umbrella you cant claim anywhere near as much as you could plus you pay fees for a company doing very little

[Mr Pointy]

LukeBrown66 said:

LTD is always best

Umbrella you cant claim anywhere near as much as you could plus you pay fees for a company doing very little

No it isn't. The costs & complexity in administration for six months of work may not be worth it whereas it's trivial to set up as a ST & there's not a huge difference in tax advantages. There's also the issue of IR35 which isn't much of a concern for a ST but is significant for working via a PSC.

[Steve H]

djones123 said:

New client told me that with sole trade option, they will pay my taxes to HRMC and i will have to do the self assessment at the end of the year. I am bit confused, i thought being a sole trader i am supposed to pay all taxes by doing self assessment. ....

I think this will refer to the industry you work in. The building trade for example runs with a high number of "self employed" workers who are actually contractors or de-facto employees and HMRC historically had issues getting their share so they set up a system where the tax was deducted at source and the SE worker could claim back there expenses later on (rather than the other way round as is the case for "normal" self employed). As I understand it, that’s the IR35 system which sounds like what your client is talking about.

[djones123]

I have gone through the following link as per new term and conditions on my contract i get status Off Pay Roll. Does this mean my contract is outside IR35?

https://www.gov.uk/set-up-self-employed

Also, my new contract states this;

---

In order to ensure compliance with IR35 we require you to sign a declaration confirming some details:
• That XYZ is not your only client
• That you have a substitute if you are unable to fulfil the services you have been engaged for

If you are unable to answer yes to these questions, XYZ will deduct Income tax & NI from
your invoice and pay it directly to HMRC.

---

Still very confusing....Looks like Client prefers to pay taxes.

Edited by djones123 on Saturday 26th September 21:38

[Steve H]

No, that makes sense.

The client is perfectly happy to pay these taxes because they are your taxes, not his .

The questions are to prove that you are pucker SE. If you are running a business that provides a service to multiple clients then IR35 isn’t supposed to apply to you; if you are in real terms being employed by your "client" but trying to use SE status then they can get in trouble with HMRC if they don’t deduct at source so they will lean towards making the deduction and leaving it to you to claw back any overpayment.

[djones123]

Steve H said:

No, that makes sense.

The client is perfectly happy to pay these taxes because they are your taxes, not his .

The questions are to prove that you are pucker SE. If you are running a business that provides a service to multiple clients then IR35 isn’t supposed to apply to you; if you are in real terms being employed by your "client" but trying to use SE status then they can get in trouble with HMRC if they don’t deduct at source so they will lean towards making the deduction and leaving it to you to claw back any overpayment.

Would i be classed as PAYE if client is paying all taxes? Is there any benefit of using umbrella company? I don't see any difference b/w umbrella and paye option here.

[LukeBrown66]

My recent experience of umbrella is nearly all bad, quoted costs are always lower than you pay even after ringing numerous umbrellas for quotes and when you call to ask why you get fobbed off with garbage replies. Simply put I have reverted to PAYE a few times as a result.

I simply feel umbrella is a con, and while working for only 6 months might not be worth it, the savings you make in that time will surely cover you, you cannot claim for as much via Umbrella, are you staying away, commuting, eating at your place of work these you COULD claim for with umbrella, not now, you can with LTD.

I am unaware of how this has changed in the recent years or under IR35, but those were the facts until a few years ago.

[Steve H]

djones123 said:

Steve H said:

No, that makes sense.

The client is perfectly happy to pay these taxes because they are your taxes, not his .

The questions are to prove that you are pucker SE. If you are running a business that provides a service to multiple clients then IR35 isn’t supposed to apply to you; if you are in real terms being employed by your "client" but trying to use SE status then they can get in trouble with HMRC if they don’t deduct at source so they will lean towards making the deduction and leaving it to you to claw back any overpayment.

Would i be classed as PAYE if client is paying all taxes? Is there any benefit of using umbrella company? I don't see any difference b/w umbrella and paye option here.

I’m not sure about the differences on an umbrella company as that’s a totally different system.

As far as I understand it, the IR35 game with deductions at source still allows you to claim expenses etc like any other SE but HMRC gets their % at the start and you claim back off them as opposed to "proper" SE where you pay nothing out until the final maths is done.

It’s about making sure the tax actually gets paid, not about altering how much should be paid.