To work as a contractor, freelance or consultant the most popular choices are either through your own limited company or as an employee through an umbrella company. Both options have their own advantages and disadvantages.
Under the umbrella solution you become an employee of the umbrella company and are paid through PAYE. You are required to submit timesheets and expenses details on a weekly or monthly basis to the umbrella company. The umbrella company will then invoice the end client or the agency and pay you a salary after deducting income tax, national insurance and their margin for the services.
Using an umbrella company is simple, risk-free alternative to setting up and managing you own limited company.
Umbrella company acts as an employer for contractors and freelances who work on fixed term assignments.
The umbrella company engages contractors by way of contract employment, offering full employment rights. It then contracts out the service of the contractor to the agency or end client.
The contractor always remains as employee of the umbrella company for the series of assignments they undertake. Hence there is no administration or paperwork required as everything is dealt with by the umbrella company.
This structure is suitable for contractors who are just staring out, expected to contract for a short duration.
A limited company is your own personal service company that you can incorporate to run your business. To incorporate you need to register the company with Companies House, register for various taxes with HMRC, set up a business bank account and organise insurance cover.
The limited company has statutory and financial obligations and is a separate legal entity from you. As a limited company director, you will be responsible for submitting all relevant tax and business documents to the HMRC and Companies House.
Limited company requires added commitment because of the statutory responsibilities and is suitable for contractors and freelancers who have a contract for more than 6 months and earning at least £15 per hour.