Limited Company Contractors Vs Umbrella Contractor’s– Which One To Choose From?

Are you looking for contracts in the world of contracting? If yes, the first step if any aspiring contractor should be to look for the best business structure under whom they can work. Contractors are basically hired on a business-to-business basis which is arranged in several ways such as Direct Contracts and contracts via some agency.

  • Direct contracts are those where contracts are made between a client company and your own limited company or umbrella contractors.
  • Agency Contracts are those which is first made between a client and a recruitment agency, and then between recruitment agency and your own limited company or umbrella contractors.

Limited Company

When you set up your own limited company you become your own company director. To run the company smoothly you have might have to face numerous statutory and obligations, you have to submit the annual account expenses to the registrar of the company.

By using a limited company, you have a benefit of operating your company in the most tax-efficient way. When you use a limited company, you the basics in the form of basic salary, which is typically low, and rest of the amount is drawn from the dividends.

Umbrella Company

Like the limited company, you can also apply for umbrella company schemes which have rapidly gained popularity over the past few years. Unlike limited company it is not a tax efficient for a business structure, but it does represent a hassle-free way to contract. The client will only pay for the scheme when you submit a weekly or monthly invoice. After submitting a monthly or weekly invoice, you will receive your salary after various deductions such as taxes, national insurances, expenses, umbrella fee, and any other pre-agreed costs.

Both limited company calculator and umbrella contracts have a different way of calculation of taxes.

  • When the umbrella company calculator is compared to the limited company calculator, here are the results,
  • When you have contracted with an umbrella company, you have to pay a weekly or monthly fee, whereas in a limited company a monthly fee has to be paid to your accountant in order to manage company task affairs.
  • In the limited company calculator, you have to pay various statutory and financial duties, whereas the umbrella company has no such legal duties to be paid.
  • When contracts are given through limited company, it can be highly flexible, as you have to pay less amount from your salary and rest can be deducted from the dividends that can be timed to maximize.

Suppose you have to find how much monthly and annual net income you can make from both the arrangements; you just have to follow simple calculation. Just take an hourly or daily rate and enter it in limited company calculator portal. Suppose you entered £25 in the field of rate and choose it on an hourly basis. Total revenue you will generate is £3,437, with a total tax of £440 which is 12% of the revenue per month and net income is £2,129 which is 61% of revenue per month.

The same amount when entered in umbrella contract calculator, total revenue will be the same as £3,437, but total taxes and net income varies with 18% of revenue and 52% of revenue, respectively.