Limited, Umbrella or Sole Trader?
Are you thinking about making the move away from permanent employment to set up as a contractor? Sole Trader, an Umbrella or Limited Company? What’s the difference and which is best for you?
Read this blog to get to know your choices, then download our comprehensive guide to help you weigh up:
- the things you need to consider
- your options
- the associated advantages and disadvantages
- next steps.
Or give us a call on 01202 375 491 to chat through your options.
With the country’s top contractors reportedly earning around three times the average UK wage, why aren’t all permanent staff taking the leap into contracting? One reason may be the confusion surrounding available options. Our following example shows you how the options can affect a professional who is considering leaving permanent employment, and how certain factors can determine what is the right path for him to take.
Peter works in IT and has been a permanent employee for 15 years. A few of his friends have recently told him about the benefits of moving away from permanent employment, and naturally Peter is curious, but unsure of his options. A friend advises him that he needs to establish if he should be a freelancer or contractor and how he will operate: as a Sole Trader; under an Umbrella; or as a Limited Company. These decisions are important, as they will have an effect on how he will pay the relevant tax due to HMRC in the future. What is right for Peter’s friend may not be right for Peter’s personal circumstances so he needs to make sure he is clear on what his options are.
So let’s take a look at each, and which solution will work best for Peter:
Freelancer or contractor?
While researching the marketplace, Peter finds a number of ad hoc jobs which are task-specific, and would not be extended once the work has been completed. For a number of these jobs he could complete them either in the client’s workplace, or from his home office. He could take on as many jobs as he likes from numerous clients, simultaneously, charging an hourly rate.
In this instance Peter would be a freelancer – an option popular among consultants, creatives and journalists.
Peter continues researching the market and finds work with a third party employer, whom he will work for exclusively for a fixed period of time. He will be paid a daily rate, and travel to the office each day to work a set number of hours. The contract can end or be extended at any point, and Peter could expect to earn approximately £600 per day.
As Peter will solely be working for this one client for the duration of the contract, he would be considered to be a contractor.
As Peter works in IT, being a contractor is a more viable option for him.
Now Peter has established what type of worker he is, he needs to select the right trading model for his situation.
Sole Trader vs Umbrella vs Limited Company
Peter now needs to decide how he is going to operate: as a Sole Trader; under an Umbrella; or as a Limited Company. These are the three most popular options for for knowledge-based, highly skilled workers earning well above the National Minimum Wage but are dependent on what solution suits an individual best, their daily rate and how they wish to operate:
Sole Trader: is a person who wishes to be the exclusive owner of the business, and is therefore entitled to keep all profits, after tax. A freelancer traditionally would consider themselves to be a Sole Trader, or self-employed. They are also liable for all losses so if the contracting business gets into financial trouble, the Sole Trader is personally liable and their private assets could be at risk. It is unlikely that an agency would take him on this basis and very few clients would allow this model so it is therefore impractical. For this reason being a Sole Trader isn’t the best option for Peter.
Umbrella: is a company which acts, for a fee, as an employer for a contractor who will have an agreed fixed-term contract. Traditionally contractors earning less than £30,000pa or who are new to contracting and are just dipping their toe in the water to see if it is the right option for them, are recommended to consider using an Umbrella company. Intouch do not offer Umbrella services, so we suggest carefully researching compliant companies offering this service and choosing one based on your personal preferences and requirements.
If Peter was earning less than the £30,000pa (on average £125 per day) or didn’t want the added responsibilities which come with running a Limited Company, then an Umbrella company solution would be best for him. He should also consider working under an Umbrella if contracting is just a short-term option for him and he doesn’t anticipate it lasting for more that 6-9 months in total. But, as Peter is in this for the long-haul and charges a higher daily rate, he is confident he can run his own company.
Limited Company: is for a contractor or freelancer who is earning on average over £30,000pa. This is just a guide and setting up as a Limited Company can also potentially benefit those expecting to earn less than £20,000 in some cases, so if this applies check with a professional contractor accountant to ensure you get the best advice and choose the right option for you.
A Limited Company ultimately allows a contractor to take the highest rate of take-home pay and be your own boss, but there are a number of considerations and responsibilities which must first be explored, and subsequently be adhered to. Engaging the services of a reputable contractor accountant means that they should guide Peter from the offset so he is fully aware of his responsibilities and obligations. The added benefit is that often the tax savings realised with the advice of a contractor accountant out-weigh the costs as professional fees are tax deductible and, of course, Umbrella companies also charge a fee or percentage for their services (which is often more expensive). If, as expected, Peter will earn £600 a day as a contractor, and is comfortable with the responsibilities, then he would be better suited to set up his own Limited Company. Using our free take home pay calculator Peter can compare take home pay based on several stated assumptions. He can input his personal contract income and contractor expenses to instantly see the difference being Limited makes.
There are other things to consider, from creating a company name and formation, to setting up a business bank account but working with a specialist contractor accountant such as Intouch Accounting means a lot of that is taken care of as part of our fixed monthly fee.
So once Peter has made his mind up about which solution works best for him and how he will operate, he is ready to make the move!
What’s next for you?
To help you think through your options we have written a new guide for contractors and freelancers: Limited Company, Umbrella, or Sole Trader – which is the right choice for you? available for you to download now.
Or contact us for a no obligation discussion to work through your options.
Intouch can help you
If the prospect of going contracting is still daunting and you are not sure where to go from here, or just need a chat with one of our experts, give us a call on 01202 375491 and we will happily discuss your situation and options with you. We are renowned with our existing clients for our dedicated service and account management, and we’re happy to take your call and assist you on this exciting new venture!
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This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.