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Limited company or umbrella company?

Published on Jun 27, 2008 |

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There are several ways to set up as an IT contractor or freelancer - the majority of contractors tend to go down the limited company route, although others may prefer to work via an umbrella company or similar structure.

Limited Companies

The term 'limited' derives from the fact that the company's finances are distinct from the personal finances of their owners (unlike the sole trader arrangement).

Shareholders in limited liability companies are not responsible for company debts, although if required, directors may be required to guarantee loans or credit granted to the company.

You can either set up a limited company online (instantly) via our partner here, or you may prefer to use a contractor accountant to do this for you.

Click here for our contractor limited company guides.

Umbrella Companies

The other option is to contract via an umbrella company. These companies are aimed at contractors who would rather work without the administrative duties associated with running their own limited company.

Typically, you would pay the umbrella company a monthly or weekly fee, and they would deduct all your National Insurance and PAYE liabilities automatically, paying you a net salary or wage.

Click here for our contractor umbrella company guides.

IR35 Tax Legislation

Your choice of whether to contract via a limited company or other structure will also be influenced by tax legislation commonly known as 'IR35'.

IR35 was introduced as a tax avoidance measure aimed at people who would set up a limited company purely to pay less tax, while performing the same duties as a permanent employee.

If your contract work doesn't fall under the IR35 rules, you're significatnly better off working via your own limited company.

If you are caught by IR35, the benefits of using a limited company are massively reduced, and although there are still benefits (such as having a 5% expenses 'allowance') to going limited, some contractors may not feel such benefits outweigh the extra administration and responsibilities which come from being a limited company director.

Before setting up a legal structure for your contracting business, you should always seek the advice of a specialist contractor accountant who can guide you through the pro's and con's of contracting via an umbrella company, or your own limited company. They should also be able to provide guidance on your liabilities under the IR35 rules.

Limited or umbrella calculator

You should download our limited or umbrella company calculator to work out what your post-tax income will be depending on your choice of business structure.