Umbrella Company or Limited Company:
Using a Contractor Calculator Can Help You Decide
As a contractor, you’ll be well aware that there are a few ways you can operate. Working through an umbrella company and setting up your own limited company are two of the most common routes. The question is, which is best for you?
To determine this, you’ll need to consider both the practicality and convenience as well as the financial side of things. In this post, we’ll discuss how a contractor calculator can assist with the comparison between umbrella vs limited company working.
First of all, an umbrella company is considered the easy way to work as a contractor. In short, you are classed as an employee of the umbrella company. While working for yourself, you’ll have your tax and invoices processed by the umbrella company – and they’ll even provide statutory benefits. This includes maternity/paternity leave, holidays, sick pay and a workplace pension.
In return, you’ll pay a monthly fee, which is usually fixed, but sometimes charged as a percentage of your invoices. Because you’re classed as an employee, you’ll be taxed by pay-as-you-earn (PAYE), which is 0% on the first £12,500 and 20% on £12,501 to £50,000 per year. That increases to 40% and 45% at thresholds of £50,000 and £150,000, respectively.
On the other hand, limited companies are seen as the ‘tax efficient’ route of contracting. Rather than simply being an employee, you’re set up as the sole director and shareholder of your own limited company. You can pay yourself a salary, but also take payments as dividends to make up your income.
Because dividends are typically taxed at a lower rate than PAYE, you can maximise your take-home pay. The downside is that you need to complete tax returns yourself, stay on top of invoicing and other admin, or pay big money to an accountant to help you out.
On top of that, you won’t have any statutory benefits like sick pay or holiday pay, so you’ll have to plan ahead financially to create your own ‘safety net’.
Since being introduced in 1999, and updated in 2017, IR35 has become a big hassle for contractors. In short, it makes it trickier to act as a company when you’re essentially doing an employee’s job.
IR35 outlines a set of criteria such as who is in control, whether someone else could complete work for you and whether your employer is obliged to continually find work for you. These criteria determine whether you’re a genuine contractor or simply working as an employee, through an intermediary like your own limited company.
If you’re found to be working within IR35, more like an employee, then you’ll have to pay tax through PAYE regardless of whether or not you have a limited company. So, it can eliminate the key benefit of this route. It can also lead to hefty penalties if you’ve spent weeks or months paying the wrong amount of tax.
On the flipside, because you’re classed as an employee and paying through PAYE already, IR35 doesn’t apply to those working through an umbrella company.
Needless to say, there are many benefits to an umbrella company that need to be factored into your decision. However, it is important for any contractor to consider their take home pay when comparing umbrella vs limited. That’s where contractor calculators can help.
First of all, it’s important to calculate how much your take home pay would be through your own limited company. The best option in terms of tax efficiency is to take a salary below the National Insurance Contributions threshold, which currently stands at £8,632 per year. That way, you’ll avoid both NIC and income tax, which has a basic rate threshold of £12,500.
After that, you can take dividends up to the value £2,000 without paying tax. Any further dividend payments will be taxed at 7.5%. Once your annual income exceeds £50,000, further dividends will be taxed at 32.5%, and 38.1% for earnings above £150,000.
A good rule of thumb for contractors earning below £50,000 is to multiply earnings above £10,632 by 0.925 then add them back to your tax-free allowance.
Now you’ve got a rough figure in your head for limited company earnings, you can start to compare it with your estimated take-home pay from an umbrella company. That’s where an umbrella company calculator comes in.
Using a good umbrella company calculator, you’ll be able to input your average monthly income to get a clear summary of costs and take-home pay. This should include the fees charged by umbrella companies and any tax or national insurance you will pay.
Rather than giving one set fee, most umbrella company calculators will display your take home pay based on several different companies. So, one provider might leave you with £2,000 a month, while another gives you £2,050. As with this example, the costs of different umbrella companies won’t vary massively, but over the course of they year, this could add up and leave you with an extra few hundred pounds if you find the right one.
Once you’ve chosen the best umbrella company for your needs, you can calculate the difference between the two options. Subtract your estimated umbrella take home pay from what you would get through your own limited company. Chances are, there will be a small increase in take home pay by working through a limited company.
The question is – is it worth it? This small increase in pay is the sole benefit of working through a limited company. In contrast, umbrella companies have the following advantages:
If you want to get a better idea of your options – and find the best umbrella company for you – try out our umbrella company calculator. At Umbrella Supermarket, you can compare several of the best umbrella companies in minutes. Best of all, there’s no call back and zero obligation.
Any contractor considering switching to an umbrella company will want to know how to find the best provider to work with.
Although you could spend your precious time and energy searching the web for the best umbrella company, there is an easier way – using an umbrella calculator.
In this guide, Umbrella Supermarket explains why every contractor should use an umbrella calculator in 2021.
If you are considering contracting you will need to decide on PAYE or umbrella.
It can be a difficult decision to make and contractors will inevitably be questioning which option will be the best for them.
To help every contractor get on the right track for them, in this guide Umbrella Supermarket looks at PAYE vs umbrella, outlining the key differences and how this will impact you.
There are many reasons that contractors across the UK opt to work under an umbrella company.
Umbrella companies offer an easy way to contract and remove the need for the contractors to worry about the burdens of admin, finances, tax and IR35, all things that limited company contractors have to deal with.
For this reason, many contractors will be weighing up their options and questioning whether it is worth using an umbrella company in 2021. To help make the decision that little bit easier, Umbrella Supermarket has put together this guide on the pros and cons of using an umbrella company.
Any contractor that is considering operating through an umbrella company in 2021 will need to understand Umbrella Company fees - from why an umbrella company charges fees, how they are paid to how much the contractor will pay.
In this guide, Umbrella Supermarket answers those all-important questions to help every contractor know exactly where they stand when it comes to umbrella company fees.
If you’ve made the decision to contract through an umbrella company in 2021, you will next need to find an umbrella company that’s right for you.
After all, there are lots of umbrella companies out there, so how do you know which one to choose?
To help you find the best umbrella company for you, in this guide Umbrella Supermarket outlines what makes a good umbrella company, so you can rest assured you’re making the right move.
One of the many advantages to operating through an umbrella company for contractors is that they become an employee of their chosen provider.
In turn, this means that the contractor will be automatically enrolled onto the umbrella company’s workplace pension scheme.
To help contractors find out more about umbrella company pensions Umbrella Supermarket has put together this handy guide.
If you are considering contracting through an umbrella company you will naturally have questions and queries over how they work.
After all, making the move to umbrella can be a big step for contractors. To help, in this guide Umbrella Supermarket explains how to get started with an umbrella company and share our top tips for using one in 2021.
PAYE or umbrella is a question asked by every contractor. Which one you opt for will have a big impact on your contracting career and lifestyle. So, it's important to make the right decision for you.
To help makes things a little bit easier, Umbrella Supermarket has put together this guide on PAYE or umbrella, outlining the key differences between each, to help you make the best and most informed decision for you.
One of the many benefits to working through an umbrella company is that you will receive holiday pay as well as a range of other statutory benefits including sick pay, maternity and paternity pay.
To find out more about umbrella company holiday pay, and how to calculate how much you will be entitled to, Umbrella Supermarket has put together this handy guide.
Contractors must make several decisions throughout their contracting careers. One big decision contractors have to make is how they will operate.
One way that contractors can work is through an umbrella company.
Umbrella companies have become an increasingly popular way to contract in the past few years, offering many benefits to the contractor. But, how do you know whether this option is right for you?
To help every contractor make the right decision for them, in this guide, Umbrella Supermarket explains when not to use an umbrella company.
There are tons of benefits to using an umbrella company, which is why they have become such a popular option for contractors in recent years.
After all, an umbrella company takes away the stress and hassle of operating through a limited company whilst offering contractors a range of advantages, such as statutory rights, paying them a salary, deducting correct tax levels and National Insurance, and taking care of tasks like expense processing and invoicing.
However, as more and more contractors opt to use the services of an umbrella company, more providers have started to claim that they are HMRC approved.
To bust the myths around HMRC approved umbrella companies and get straight to the facts, in today's guide Umbrella Supermarket look at whether HMRC approved umbrella companies really exist, so you know exactly where you stand.
If you're considering making the leap to contracting, you will understandably want to know how much you will have to pay in umbrella company costs. After all, this amount comes directly out of the contractor’s pocket, so it’s important to be clued up on how much you should expect to pay.
To help contractors, in this guide Umbrella Supermarket answer the all-important question of how umbrella companies cost in 2021.
