Rather than contracting through your own limited company, you can opt to operate through an umbrella company instead. This is an arrangement whereby the contact is assigned to the umbrella organisation, and you become an employee of theirs.
However, unless you are only planning to be contracting for less than a few months, this becomes an expensive alternative.
Special Dispensations
In a nutshell, there aren’t any special arrangements to be made with HMRC. Despite what many umbrella companies claim, nobody has negotiated special deals with the tax man, it just doesn’t happen.
What a dispensation is, is an agreement made by the umbrella company to HMRC, that they will enforce a proper internal vetting procedure to ensure that all expense claims made by the employee contractors are legitimate and receipted. Now that’s an important point, because the responsibility for expense claims made falls to the contractor, not the umbrella company.
Tax Planning
If you work through your own limited company, most likely you will take a modest salary, and top up your income with dividends. Dividends, which are a distribution of the company profits, attract no National Insurance, so this is an effective way of extracting money from the company.
The proportion of dividends you receive is in accordance with the amount of shares you hold in the company. This means that if for example a partner is also a shareholder in the business, then they will receive dividends also.
In addition, as company shareholders, you may leave money within the company from one financial year to the next, free from taxation.
None of the above tax planning measures are open to you as an employee of an umbrella company, and instead, all of your income, less real incurred expenses are subject to PAYE (as well as employers NI).
Summary
Its easy to setup and run your own limited company, and on a typical contract, you will save many thousands of pounds over the year.
Our online system and clear straightforward advice, will ensure that the admin involved is kept to a minimum leaving you time to enjoy the financial rewards that contracting offers.
