Should I use an umbrella company as a contractor?
While umbrella companies are a legal business arrangement, be wary of those that might be breaking the law. Avoid those that tend to be providing offshore schemes or other tax avoidance mechanisms.
Many companies that hire cheap contractor accountants may require you to work through a company so that they don't have to comply with the IR35 regulations. It is faster and cheaper to join an umbrella organization than to start your own. You might also use an umbrella company as a temporary solution when you intend to start your own business.
The following are the key advantages and disadvantages of using an umbrella company:
Advantages
You don't need to file a tax return because all of the income tax payments have been made.
As an employer, you are entitled to statutory sick, maternity/paternity, and vacation pay, as well as enrolment in a pension plan.
Some businesses also have additional benefits such as health insurance, access to social care, and benefits packages.
Disadvantages
You may have to pay rates, so it might not be very cost-effective.
Since certain umbrella firms operate illegally, it's important to double-check what you're signed up for.
You might find that forming a limited company is more tax effective.
Which is preferable: an umbrella corporation or a single-person limited liability company?
Rather than using an umbrella corporation, many contractors choose to form their own limited company. Since you won't have to pay any other fees and you'll have more tax freedoms, this path could be more cost-effective. To save money on taxes, you might pay yourself a mix of a simple salary and dividends. You may also give some shares to your partner so that they can benefit from dividends and take advantage of their tax-free allowance.
If you want to run your business as a one-person limited company, your company would be treated as a different legal entity from you, limiting your personal liability (compared to being a sole trader). You will, however, be a company director with regulatory and financial responsibilities. That means you'll have to pay corporation tax, apply VAT registration to your invoices, and file annual reports with Companies House – all of which an accountant can handle for you.
Other things to think about are the risks you're prepared to take if you need business insurance, what kind of work you do, and how much money you make. Cheap accountants in London will help you decide which path is best for you.
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