Before you begin contracting, one of the first things you need to consider is which business structure you are better suited to. From what everybody ought to know about umbrella companies to the advantages and disadvantages of umbrella companies – we have it all on our website! But what about the umbrella company alternatives? Continue reading as we explore the different ways you can operate as a contractor or freelancer.
One of the most popular umbrella company alternatives is setting up your own limited company. If you work on contracts deemed outside IR35, working through your own limited company is the most tax-efficient way to operate as a contractor.
As a director of a limited company, you can take advantage of a wide range of tax benefits and legitimate business expenses which are not available to umbrella company employees. Limited company contractors can choose how they pay themselves through a combination of salary and dividends, which provides greater opportunities for tax planning.
However, as a limited company director, there are specific administrative duties which you are required to complete, such as business accounts and tax returns. These duties can be time-consuming, but a good contractor accountant can free up your time and complete these tasks for you.
Finally, if you set up a limited company, be prepared for your company records to be in the public domain. Companies House require annual accounts to be filed from all limited companies, and anyone can access these records.
Another popular umbrella company alternative is a sole trader. Many self-employed individuals start up as a sole trader due to the lower set up costs, ease of set up and full control over the business, and the small amount of administration required. Another benefit of being a sole trader is that you can keep all of your business’s profits after tax. As a sole trader, you don’t have to register your business with Companies House, allowing more privacy than a limited company.
However, a significant difference between a limited company and a sole trader is that your personal and business assets are not kept separate as a sole trader. If the business were to encounter financial difficulties, then a sole trader could risk losing their personal savings, home, or other assets to settle the debt. A sole trader structure is also less tax-efficient than a limited company. A limited company director can utilise tax benefits to maximise their income, whereas a sole trader does not. A sole trader must pay tax on any income above the personal allowance.
The final umbrella company alternative is Agency PAYE, which operates similarly to an umbrella company (link to agency PAYE blog when its posted). If you choose to get paid via agency PAYE, you will become an employee of the company. As your employer, they will be responsible for all administrative and payroll-related tasks, leaving you to concentrate on your work. Unlike a sole trader or limited company business structure, when you are paid through your agency, they will calculate your tax and National Insurance Contributions (NICs) and pay them to HMRC on your behalf. You don’t have to worry about remembering to pay a tax bill!
Agency PAYE and umbrella companies offer a compliant and reliable payroll option for contractors and freelancers who cannot set up their own limited company due to IR35 legislation. However, as both entities employ you, this means you cannot take advantage of the tax benefits that limited company contractors enjoy. Ultimately this does reduce the amount you can expect to take home and a contractor being paid via agency PAYE or an umbrella company will typically retain between 60-65% of their income.
Benefits of using an umbrella company
We couldn’t end the article without at least outlining some of the benefits of working via an umbrella company:
- Compliant with all UK tax law and HMRC legislation
- Insurance is included as part of the service
- Statutory benefits
- Continuity of employment
- Minimal ongoing administration
- Easy to sign up, no tie in period and much more!
Don’t just take our word for it – speak to our top 10 umbrella companies!
We hope this articles has helped you identify the umbrella company alternatives.