Is a Limited or Umbrella Company a Better Financial Choice for your Consultancy?

Consultancy help is not always readily available as most first time consultants will now. If you’re ready to escape the rat race as you know it and swap the safety and security of a staff job for the riskier, potentially more lucrative route of starting your own consultancy, there are a number of important decisions you need to make.

One of your biggest considerations should be the best way to set up your new consultancy business to minimise your long term tax liabilities, while maximising your take home income. There are also a number of benefits associated with each type of company structure that can make your business easier, or more difficult to work with. In addition the way you take your income can directly affect the risks should anything go wrong in the future and the company becomes insolvent.

For many first time consultants, this decision can be a tough one. So, we’re going to take you through the respective advantages and disadvantages of private limited companies and umbrella companies to help you see things more clearly.

Are Umbrella Companies or Private Limited Companies More Tax Efficient?

Trading through your own private limited company is the most tax efficient way or working, but this does not mean that an Ltd is the best option for every consultant. For example, those on short term contracts (lasting less than three months), worth less than £25,000 a year, might be better served by an umbrella company instead.

Trading through a limited company allows you to take home 75-80 percent of the contract’s value, while working through an umbrella company could reduce your take home pay to as little as 60-65 of the contract’s value. Clearly then, the decision you make will have a direct impact on your bottom line.

Umbrella companies

All UK umbrella companies operate PAYE, so effectively you become an employee of the umbrella company and pay the same level of tax as a permanent employee. You’ll also have to pay employer’s National Insurance contributions, which is 13.8 percent on earnings of more than £156.01 a week.

Advantages

• Umbrella companies are very easy to use – all you need do is submit your time-sheet and expense details and the umbrella will make sure you are paid;

• The burden of filing your accounts and paying your taxes is removed – tax and National Insurance contributions are taken at source, so the money you receive is yours to keep;

• This is a great way for new consultants or contractors to try out consulting work before committing to the longer term;

• The umbrella company takes care of all your invoicing, administration, the chasing of payments and processing your payroll;

• Umbrella companies can be an effective solution if you are working on a short term contract and receiving a modest hourly rate.

Disadvantages

• This is the most expensive way to take on contract work as you will pay full PAYE, Tax and National Insurance contributions, much like a permanent employee;

• You will have to rely on the umbrella company to collect the money from the client and pay you on their behalf;

• You don’t have the same level of control over your affairs as you would with a limited company;

• Some umbrella companies might suggest you will make more money from expenses claims, but you should only claim expenses you have genuinely incurred through the course of your work.

Limited Companies

A limited company is an organisation you can set up to run your business. The finances of the company are separate to your personal finances, and any profit it makes is the property of the company. This profit can then be distributed to the company’s shareholders once corporation tax has been paid.

Advantages

• A limited company is the most tax efficient way of working as a consultant – you will typically take home 75-80 percent of the contract’s value;

• You have complete control over the financial affairs of the business – there is no need to wait for a third party to pay you your money;

• You can claim a much wider range of expenses than if you were operating through an umbrella company, such as equipment, software, phones, travel, internet and more;

• You can access the Flat Rate VAT Scheme, which could bring in additional income if you only claim very limited expenses;

• Your personal assets are protected if the company fails. As a member of a limited company, you cannot be held personally liable for debts the company accrues;

• Incorporating your consultancy can add credibility and a sense of professionalism to your business;

• Becoming a limited company means your company name is protected by law and no one else is allowed to use it.

Disadvantages

• As the director of a limited company, you have a number of responsibilities you must abide by. Failure to follow the rules could lead to you being fined, prosecuted or disqualified as a company director. You could also be made personally liable for the company’s debts;

• A certain amount of paperwork is required to keep the limited company running and inline with its obligations;

• You will have to file accounts at Companies House and submit your company tax and self assessment tax returns and every year. You will also have to make sure your tax bill is paid on time;

• Limited companies can prove to be more costly if you only take contract work for a short period of time.

How can we help?

If you run a limited company consultancy business in the UK that’s experiencing cash-flow problems, we can help. We can advise you on how to handle the situation in the best possible way to help you and your business thrive again. Please get in touch with our company rescue experts for a free, no-obligation discussion of your circumstances. Call 0800 074 6757 or email: info@companydebt.com or use the live support on the lower right hand side of your screen.