Limited Vs Umbrella

Limited vs Umbrella

PAYE Umbrella Limited Company
In this case the contractor(that is you) will essentially become an employee of the umbrella company. The umbrella company will then process timesheets received from the contractor and invoice the client(the company for which the contractor works) for work completed. In this case the first thing you will need to do is open a company. This might sound like a very difficult and time consuming task but its actually much easier then it sounds and is an area where we can be of assistance. Please see forming a company for more information.
The contractor will in turn be paid as a PAYE employee less the umbrella company charges. Once you have opened your company you will need a company bank account.Once the bank account is open your company is completely operational. The company is contract can be with the end client and you as the company director will control the company bank account and decide on how much to pay yourself; which comprises of salary and dividends.
Umbrella companies will also allow some basic expenses to be claimed such as general travel expenses, hotel and accommodation expenses, professional subscriptions etc .However some umbrella companies also claim special expense policies that allow expenses to be claimed without proof; but Inland Revenue has been quick to challenge companies operating such bogus schemes as they are seen to encourage fraud and tax evasion. The company can also claim many business expenses such as travel and subsistence, business telephone, training and other professional subscriptions, accountants fees etc. Please see expenses for more information.
The advantage of working through a PAYE Umbrella Company is the simplicity it offers, you need not worry about any paperwork just fill in your time sheet and get paid ,the umbrella company will handle all tax and NI deductions. The major advantage of working through a limited company is that is allows more opportunity for tax planning, allows for a wider range of expenses to be claimed and allows a greater control over your financial affairs.
However a major downside of operating through an umbrella company is that the contractor is left with just 60%-65% of their contract. The downside however is that there is a certain amount of paperwork involved and its not ideal for people working on contracts temporarily.
However in order to work in a tax efficient way your gross salary will be kept low; to maximize dividends payable to yourself as shareholder (thereby avoiding employees and employers national insurance contributions).By working through a limited company you will take home 75% – 80% of your contract.