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Umbrella versus Limited Company demystified

Umbrella versus Limited Company, which one is right for me?

umbrella-versus-limited -company

An umbrella company means effectively you are an employee, hence income tax upto 50% and national insurance of 12.8%. There is a lot of confusion out there on whether you should be on an umbrella scheme or operate through a limited company.  Here is why:

The simple answer to  the umbrella versus limited company, if you work more than three months and will earn less than £20,000-£25,000, use an umbrella.

However, if you are contracting or freelancer for a bit longer then it’s using a Limited company all the way.

National Insurance no more! 

An umbrella company means you will have to pay both employees NI (12%) and employers NI (13.8%)

So for example if Jack, who is an IT contractor, is on a day rate of £375 will pay £14595.60 with an umbrella company on just national insurance. With a limited company Jack would only pay £2,000 (depends on the salary you choose)

That’s a saving of £12,595.60!

Flat Rate Scheme Profit!

So if we carry on our example of Jack, the IT contractor, who is on £375 a day, on the vat flat rate scheme he would charge 20% VAT but only pay over 13.5% of the gross amount leaving a “profit” of £3563.

That’s another saving of £3,563

In total, that is a saving of £16,158.60 which translates into a new car, that extension you wanted, obviously we advise you put some away for a rainy day.

What about if earn a lot less than £375

With accountancy fees between £75-£250 per month, Jill, who is an Iphone app developer,  is unsure to go Limited. Jill who is on £200 per day gets us to do the maths for her. The results are below:

National insurance saving would be £9,263.16

Flat rate saving would be £1,900.

That is a saving of over £10,000

What about if I earn a lot more than £375?

Enter our Scottish high earning Oil and gas engineer, Jock who is on £600 a day. National insurance saving of £21,483.16

On the flat rate schemes have a profit of £5,700, please note it is only 13.5% in the first year then it reverts back to 14.5%, for more information read our guide. (add link)

So to summarise:

Name
Day Rate
National insurance saving
Flat rate” profit”
Total
Jill£200£9,263.16£1,900£11,163.16
Jack£375£12,595.60£3,563£16,158.60
Jock£600£21,483.16£5,700£27,183.16

That’s would be a saving of £11,163.16 which means that your accountancy fees would pay itself over many times.

We are here to help.

So that’s the umbrella versus limited company question dealt with. Of course every case is different, so why don’t you pick up the phone and talk to one our friendly chartered accountants, who will talk through the tax planning opportunities of a limited company or whether you should stick with an umbrella company.

 

*opinions of are of our own estimates have been used and this is just an outline for a more detailed chat, please contact your accountant. We have used the tax tables for 2013/2014.

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About Hardeep Mangat

Hardeep is a down to earth accountant, who loves helping contractors, freelancers and small businesses save tax and make more profit. He also has a particular interest in IR35 . Hardeep attended University College London and is a Chartered Certified Accountant, who previously worked for Credit Suisse Investment bank and at a local accountancy practice.

Hardeep on Linkedin and Google+


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