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 £770 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% (2011 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.
If you would like to know more about working through your own limited company click here, download one of our many FREE download guides, speak to one of SJD's Client Liaison Managers on 0500 152500 / 01442 275789 or email rachel@sjdaccountancy.com.
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 11,000 clients.
We are the only National specialist firm of accountants with offices in all major UK cities so you’ll never be far from your accountant. SJD also have more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATII, ATT, ACCA, CA, ACA, FCCA, ACMA. You’ll also be pleased to know that we are one of the lowest priced as well.
SJD have also won every relevant industry award possible, including:
- The British Accountancy Award Winners 2011 for ‘Accountant of the Year’.
- Winners of the Accountancy Age Awards for Excellence in 2007 and 2004, finalists in 2010 and all years since 2003.
- Four time winners of the 'Best Contractor Accountant' award voted for by visitors to Contractor UK 2010 to 2007.
- Winners of the "Sunday Times Best Small Companies to Work For in the UK" Award, achieving the highest position ever for a firm of accountants.
- 'Excellence in Customer Service' - Finalists National Chamber of Commerce Awards 2008.
- 'Business of the Year' - Finalists National Chamber of Commerce Awards 2008.
- 'Outstanding Three Star Status' - Best Companies Accreditation 2009.
- Award for 'Customer Commitment' at the Institute of Customer Service UK Customer Satisfaction Awards 2011.
- Deemed PCG Accredited Accountants and fully MSC compliant.
- UK Customer Experience Award for 'Best Professional Team of the Year' 2011.
We offer all clients:
Free face-to-face meetings. This is another unique service, only SJD offers free face to face meetings - tax is complicated and sometimes only a meeting will do.
Unlimited access to your own dedicated accountant. No call centres, no outsourcing, no automated call handling. Simply telephone, e-mail or meet your own dedicated accountant face to face.
Money back service guarantee. All your telephone calls and e-mails will be answered the same day or we will refund your monthly fee's.
Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market.
All inclusive low cost monthly package which includes completion of accounts, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, unlimited access to your accountant and all company returns.
All this for a fixed monthly fee of £110 plus VAT, which is one of the lowest prices in the market. And most importantly, in a recent survey 98% of our clients rated SJD as 'better than other accountants' - we are working hard to convince the other 2%!
If you have any question about contracting or would like any further advice please either contact your SJD Accountant or call our new client services helpdesk on 0500 152500 / 01442 275789 or e-mail rachel@sjdaccountancy.com
Appoint SJD Accountancy and never worry about your tax or accountancy affairs again!
You may also find the following pages, guides and case studies useful:
Take home pay calculator - How much could you be taking home
Contractor FAQ - All your frequently asked questions and their answers
First time Contracting or Freelancing? - A summary of the alternatives along with pros and cons
Choosing an accountant - For a full review
Step-by-step Guide to Contracting - Download a FREE copy of our guide
Limited or Umbrella? Can't decide? - We help you decide which is best for you
Guide to Contracting - All the best guides to contracting in one place
Expenses Guide - Know exactly what you can claim
Umbrella company guide - Everything you ever wanted to know about umbrella company services
IR35 Guide - A great plain English guide to IR35.
