Take home pay - Limited company or Umbrella company

The differences

There is one question we get asked every day, not nearly every day or most days but actually every single day. “How much better off will I be using a Limited company over an umbrella company?”

The main savings with a Limited Company over an umbrella are around National Insurance and the Flat Rate VAT Scheme.

National Insurance Savings

With an umbrella company you will pay both employees and employers NI (Employers NI is 13.8% of your salary, and employees NI 12% for the first £797 a week, and 1% thereafter (both after tax free personal allowances).

On a typical contract of say £350 per day you will pay around £300 a week in NI through an umbrella company whereas with your own Limited Company you will pay just £30, so the NI savings alone come to about £12,000 a year assuming a 45 week working year.

If you are a contractor on £200 per day you'll save around £9,000 or if on £600 a day save around £20,000.

Flat Rate VAT Scheme

The flat rate scheme is an incentive provided by the government to help simplify taxes. For example as an IT Contractor you would charge VAT on your invoices at 20% (2013 rate) but only pay back the Revenue in your first year 13.5% of the gross amount and 14.5% in subsequent years. Visit our Flat Rate VAT Scheme Guide page for a full list of the standard rates depending on your profession.

This provides the following additional income (based on a 45 week working year):

  • £200 per day contract - £1,710 extra per year
  • £350 per day contract - £2,992.50 extra per year
  • £600 per day contract - £5,130 extra per year

On top of NI and VAT you'll also earn interest in your savings (savings put aside to pay for your taxes) plus have access to a broader scope of expenses than using an umbrella company.

One way of looking at it is, if you have two contractors both on the same £600 per day. One contractor ‘A’ uses an Umbrella company and another ‘B’ trades through their own limited company the difference after the affect of NI and flat rate VAT scheme are as follow:

A - (Umbrella) real value of contract after NI is around £115,000
B - (Ltd Co) real value of contract after NI and Flat rate VAT is around £138,000

An extra £23,000 on the contract value, that’s like billing your clients an 38 days per year.

The above does assume the contractors are outside IR35, if inside you can still claim: travelling and accommodation expenses, 5% of your turnover, benefit from the VAT flat rate scheme and receive interest on the funds held within your own company.

Basically, income tax or corporation tax and personal taxes via an umbrella company or through your own limited company are roughly the same. There are of course more opportunities for tax planning through a Ltd Co but that’s something you can discuss in greater detail with an accountant.

Click the link for more information about the positive and negatives of using a limited company vs umbrella company.

Click on the following link if you would like to know more about working through your own limited company, download one of our many FREE download guides, speak to our new client services helpdesk on 01442 275789 or email sophie.lewis@sjdaccountancy.com.

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SJD Accountancy

SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 15,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

  • Unlimited face to face meetings. This is a unique service only SJD Accountancy offers - unlimited face to face meetings across the UK - tax is complicated and sometimes only a meeting will do.
  • UK's Largest contractor accountants with more qualified staff. No call centres, no outsourcing, no automated call handling. Simply telephone, email or meet your own dedicated accountant* face to face.
  • Money back service guarantee. All your telephone calls and emails will be answered the same day or we will make a full refund of that months fee.
  • Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market, including: Best Accountant for Contractors, Accountant of the Year and Best Professional Service Team to name just a few.
  • All inclusive low cost fixed fee accountancy package which includes completion of accounts*, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, your own dedicated accountant* and all company returns for a fixed fee of £120 plus VAT per month.

If you have any questions about contracting or would like any further advice please call our new client services helpdesk on 01442 275789 or email: janice@sjdaccountancy.com.

Appoint SJD Accountancy and never worry about your tax or accountancy affairs again.

Form your own Limited company with SJD - our same day online company formation service includes company bank account set up, VAT/PAYE registration and advice on optimum share structure. 

You may also find the following pages, guides and case studies useful:

*If you would like us to complete your company year end accounts we simply ask that you have been a client of SJD for one year or have made 12 monthly payments. All accountants are part or fully qualified.