Choosing whether to set up a limited company or use an umbrella can be a difficult decision for contractors. Since pay can often be a factor when it comes to making the choice, our guide is here to help show you your potential earnings.
There are two main savings with a limited company over an umbrella company: National Insurance and the Flat Rate VAT Scheme.
National Insurance Contributions
Being paid by an umbrella company means that you will pay National Insurance as both an employer and an employee. Employer’s National Insurance is 13.8% of your salary, while employee’s National Insurance is 12% for the first £962 a week, and 2% thereafter (both after tax-free personal allowances). These contributions will be deducted from your wages by your umbrella company before being paid to you.
As the director of your limited company, the rate of National Insurance you are liable for will vary depending on earnings. As dividend income is not subject to National Insurance, it may be tax efficient to take a salary and the remainder as a dividend. You will be responsible for your National Insurance. However, your accountant can help you with this process.
Flat Rate VAT Scheme
The Flat Rate VAT Scheme is an incentive provided by the government to help simplify taxes and is eligible to contractors who earn less than £150,000 in a financial year. This means that contractors can charge 20% VAT on invoices but only pay back HMRC in your first year 15.5% of the gross amount and 16.5% in subsequent years.
You can also visit our Flat Rate VAT Scheme guide page for a full list of the standard rates depending on your profession.
Looking for an umbrella company?
We understand that the right support by your side is crucial, whether you’re working through your own limited company or under an umbrella. That’s why our sister company, Parasol, is here to help.
Using their years of experience in supporting contractors, they’re well placed to get you up and running and give you the tools to help you throughout your career.
Contact Parasol Today
Our partner umbrella company Parasol are one of the best in the business, with over 8000 employees they are well placed to give you the best advice and guidance in the industry.
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