Is an umbrella company the way forward?

One of the first decisions you will have to make if you are to become a contractor is whether to set up your own limited company or use an umbrella company.

To make this decision, you need to understand exactly which options are available to you and what each option entails then weigh up the pros and cons of each.

Umbrella companies

One of the most daunting aspects of being a contractor is the administration involved and the need to comply with relevant tax laws.

There is a significant amount of paperwork involved in contracting and it is also your duty to chase payments, fill in expense claims and ensure you are in full compliance with HMRC rules, all of which are time-consuming and tedious processes.

What an umbrella company does is employ you thus taking care of the administrative side of your affairs; chasing payments, ensuring you are in full compliance with HMRC legislation and paying you.

When you use an umbrella company, you will sign a contract of employment and then all that is required of you is to submit the agency or client timesheets, any expense claims and other relevant paperwork and the umbrella company will do the rest.

There are several advantages to using an umbrella company, with the main one being that you can concentrate on finding clients and leave the administrative and tax side of your affairs to qualified experts.

In addition, you avoid the costs involved with setting up a personal service company, you also have your income paid directly into your personal bank account and do not have to worry about paying the right amount of tax to the relevant authorities because it is done on your behalf.

On the downside, you will not enjoy the same tax benefits as a contractor with his own limited company.

Limited company

When you form a limited company, you become the director and shareholder of your own business, giving you complete control over how it is run.

You will need to register your company with Companies House and complete all of the relevant paperwork.

As you will be in complete control, the administrative side of your affairs will be your responsibility. The amount of paperwork involved with setting up and running a limited company is significant and will take up a large chunk of your time.

An umbrella company will handle your invoices, timesheets and other administrative issues but as a personal service company, you will have to ensure all paperwork is completed and that you are genuinely outside the scope of IR35.

One of the biggest advantages of setting up a limited company is the fact that you can withdraw funds from your company as a dividend rather than receiving your income as a salary, which gives you significant tax advantages.

In addition, the limited liability means your personal assets are never at risk should the business ultimately fold.

Which option is best for me?

When making your decision, you need to take into account your individual circumstances, as this will determine which of these options is available to you.

You may benefit from speaking to a company that provides both umbrella and accountancy services options about your situation, as they will be able to advise you about the best way forward given your attitude to administration and what your main goals are.

It may also be a good idea to discuss this with an existing contractor and ask them if they are happy with the decision that they made.