Making the switch from permanent employment to contracting can be one of the most exciting times of your career. The first major decision you need to make as a contractor is how to operate; do you work as an employee of an umbrella company or through your own limited company?
You may be wondering, which option is the best for you? Thankfully, help is at hand. We have all the information you need from the experts at Parasol, including the pros and cons of each pathway, so read on for advice to help you make a well-informed decision.
What is an umbrella company?
An umbrella company is an excellent choice if this is your first venture into contracting or you’re planning on only contracting for a short period of time (for three-six months, for example). The main reason many contractors choose an umbrella company is the ease of use and less administration.
If you decide to go down this route, you are considered an employee of the umbrella company. You will receive a contract of employment; as well as giving you peace of mind, this also entitles you to the benefits given to a permanent employee. This includes:
- Holiday pay
- Sick pay
- Maternity/paternity pay
As well as receiving these benefits, you will also be able to claim business costs and expenses. The only drawback is that you can only claim these back if they are incurred during an assignment.
Advantages of working as an umbrella employee
Working as an umbrella employee can be the simplest way of operating whilst you’re contracting. The umbrella company will automatically deduct Income Tax and National Insurance contributions on your behalf, so once you receive your salary, the money is yours with no need to worry about additional liabilities.
What is a limited company?
A limited company is a company which you can set up in order to carry out your services. They have their own legal identity; this allows you to own company assets as well as having a business bank account – this account must be separate from your personal finances. If your limited company makes any profit, it then owns this profit.
Although contractors working through a limited company can receive more money than those working under an umbrella company, this increase in income is a result of slightly more paperwork each month. You will need to raise your own invoices with your client and – with the help of your accountant – make your own National Insurance and tax contributions.
Advantages of contracting through a limited company
Forming your own limited company and working as a limited company director can be the most tax efficient way of working. In terms of expenses, limited company directors are also able to claim on a bigger selection of expenses than those working through an umbrella company.
Forming a limited company gives you the ultimate control over your business finances, providing the freedom you perhaps first expected when you decided to become self-employed.
Working as a limited company director is a great option for those who are planning on contracting for the long-term.
A quick overview of both options
So far, we’ve explored both contracting under an umbrella company, and through a limited company. It’s now your choice to take charge of your career, and decide which way is best for you.
To summarise, an umbrella company could be the best option if you’re new to contracting and want to avoid the hassle of paperwork. It is also the best option for you if you’re intending on contracting only for a couple of months at a time.
A limited company does come bundled with slightly more paperwork and added responsibility but if you’re planning on contracting long-term working through your own limited company could be a great option.
Helping you decide
Whether it’s a limited company or umbrella company you choose, we hope our guide has been useful in helping you decide which option fits you best. For a tailored recommendation, leading umbrella company Parasol offers a set of simple questions designed to point you in the right direction.