When you embark on a contracting career, the first major decision you’ll have to make is whether to join an umbrella company or set up your own business.
Although both options offer you an escape from the daily grind of traditional employment, there’s a big difference in the amount of responsibility you’d have to take on.
We understand that as a new contractor, it might seem difficult to decide which option is best for you. Thankfully, help is at hand!
We’ve created this handy guide that outlines the key differences between the two routes – so hopefully this will help clear things up for you!
An umbrella company tends to be the first port of call when starting out in a contracting career. That’s because they’ll take care of all your Income Tax and National Insurance responsibilities, leaving you free to concentrate on your assignments.
Compliant umbrellas, such as Parasol, provide you with a contract of employment. This means you’ll have access to all the rights and benefits given to permanent employees, including holiday, sick and maternity & paternity pay – how’s that for reassurance?
What’s more, you will be able to claim legitimate business costs and expenses – as long as they’re incurred during an assignment. The types of costs and expenses that can be claimed and reimbursed are dependent on the type of assignment you’re working on and whether it’s subject to supervision, direction or control (SDC).
You won’t have to worry about IR35 either, as umbrella contractors aren’t affected by the rules.
Here’s a brief summary of the benefits you can expect as an umbrella contractor:
- All legal, employment, tax and contractual obligations taken care of
- Greater earning power compared to permanent employment
- Claim legitimate business costs and expenses
- Spend far less time and effort on administration duties compared to a company director
- Get paid quickly, accurately and on time
- Benefit from employment rights, plus Professional Indemnity and Employers/Public Liability insurances
For more information about umbrella companies, please click here.
While it’s true that limited company contractors can receive more money than those working with umbrellas, this increased earning power doesn’t come effort-free. You’ll be self-employed and required to operate as an independent business and carry out all the associated administration, such as:
- Registering as a director of your own company and keeping Companies House informed of your accounts and significant changes to your company
- Opening a separate business bank account
- Invoicing your agency or client
- Responding to communications from accountants, HMRC, Companies House and other organisations
- Ensuring that all documents/tax returns are filed on time
- Producing detailed accounts, invoicing and VAT records
- Completing an annual self-assessment tax return
- Paying tax due on any dividends
- Submitting and paying accurate Corporation Tax returns
- Conducting regular IR35 reviews to ensure you’re on the right side of tax law
We know this list seems lengthy, but thankfully help is at hand through our sister company ClearSky Contractor Accounting. They’ll be with you all the way to ensure running your company is as straightforward as possible, and that you’re not left in the dark about the key milestones of running a compliant business.
Need more help?
We hope this guide has helped explain the differences between the two options. If you need more advice, or are still unsure about which route is right for you, Parasol is here to help.
As one of the longest-established firms in the industry, we’d like to think we know a thing or two about contractors. That’s why we’re able to recommend a solution that suits you, based on your own personal circumstances.
We’re committed to being with you all the way through your career, and always fit our services around your busy WorkStyle. Our online portal lets you submit your timesheets and expenses any time day or night, while our dedicated team of advisors is on hand to offer assistance when it’s convenient for you.
If you’ve decided to go down the limited route, you’ll be in safe hands with our sister company ClearSky Contractor Accounting. Like us, ClearSky is dedicated to making contractors’ lives as hassle-free as possible – leaving them free to concentrate on what they do best.