Apart from take home pay and travel and subsistence claims, here are some of our top tips you should also take into account:
IR35 is actually not applicable to umbrella as you are classified as the employee of the umbrella, and your entire income will be taxed under PAYE.
This is one of the most important things to consider for contractors with their own Personal Service Company. Not only will IR35 affect one’s remuneration structure, it will also determine whether the contractor is subject to the restriction on Travel and subsistence claims from 6 April 2016. This could cause problems for contractors if they get their IR35 status wrong.
IR35 status for contractors with a limited company is not as straightforward as you may think. We’ve come across many contractors, recruitment consultants and accountancy service providers who think contractors are automatically outside of IR35 if they have their own limited company, or are working as a freelancer.
If a contractor is part and parcel of their end client, regardless of any recruitment agency involvement – it’s difficult to avoid IR35. Unfortunately, there’s no such thing as a ‘watertight’ or ‘IR35-safe’ contract, as HMRC can look at the actual substance of the role, rather than just the written T&Cs of a professional contract.
Please note that you may fall inside IR35 even if your fellow contractors operate outside of IR35, as individual circumstances can differ even if the role is seemingly identical.
Have your contract reviewed by a professional contractor reviewer such as our associates Bauer & Cottrell. For umbrella contractors thinking about switching to limited, always consult with an industry expert first to assess the risk of IR35.
While you are working under an umbrella company, all of your income will be taxed under PAYE, and the umbrella company will be responsible for transferring the rest of your earnings to you. In doing this, you will receive your entire net income for the month immediately, as if you were employed by the client directly. However, this will also mean that all of your tax liability will crystalise immediately and be paid to HMRC upon receiving your income.
Limited set-up works a little differently. Your accountants can only run your payroll and/or recommend dividend income based on a prudent estimation until your accounts are finalised, or perform an accurate deemed payment computation at the tax year-end if you are inside IR35. Furthermore, any tax planning will also affect the amount of cash you can withdraw from your company.
When running a limited company, please ensure you have discussed your monthly cash flow requirements with your accountant, as a generic ‘tax efficient’ structure might not be sufficient to pay your bills. Your accountant will also be able to give you a good provision of addition tax liabilities to avoid nasty surprises when doing your tax return.
Additional administrative work
Administration work for an umbrella contractor should be minimal apart from logging your timesheets and expenses.
Unlike an umbrella company, you are responsible for your own limited company. Even with our most comprehensive package, which minimises your administrative burden, you will still need to complete some additional admin work. It will be your responsibility to transfer tax and National Insurance payments to HMRC by various deadlines throughout the year. It is also essential that you keep your accountant informed of your company’s affairs, by regularly updating your accounting records.
Use Contractor Accountants that are familiar with the administrative requirements for contractors and offer all-inclusive monthly fees so releasing your administrative burden will not result in another headache with their bill.
Privacy and confidentiality
Your personal details are private and confidential.
All limited company details and their annual accounts, including directors’ information, can be obtained by the general public via the Companies House website.
Consider using your accountant’s address as your company’s registered office to avoid giving out too much information right on the ‘front page’ of Companies House.
With all things considered, is limited the right choice for me?
Providing you’re happy with the considerations we’ve highlighted above, and even if you are caught under IR35, you may still be a little better off financially, compared to an umbrella set up.
However, it’s worth bearing in mind that if your contract is only short term, part-time or at a lower rate, the gain is inconsequential. We highly recommend taking into consideration all the above factors before making a decision.
Therefore, subject to your circumstances and preference, the answer to the above can be very different.
Our expert accountants will be most delighted to assist you in making the right decision. Speak to us today on 0207 078 0211, or contact us online.
We are offering free consultations to contractors that are looking to switch from umbrella to a limited company.
To learn more about our umbrella service, please visit our sister company Cloud9 Umbrella website.