Churchill Knight Blog

Many contractors or freelancers are not in a position to set up a limited company, partnership or sole trader. Many are searching for the means to reduce taxes while increasing earnings. These benefits are exactly what an umbrella company may be able to offer.

An umbrella company offers individuals the means to operate multiple contracts through a managed limited company (an ‘umbrella company’) without administration. The time that would be employed on administering a limited company does not apply to an umbrella company. Timesheets, expenses, invoicing, tax calculations, collections, filing and contracts are a thing of the past.

Some umbrella companies’ offer extended benefits. In this way they are able to reduce tax liability. Other umbrella companies offer these benefits as well as being able to add on tailored requirements such as pension plans and health cover. Umbrella companies will also offer liability covers such as Employer and Public which will protect them in the event of any legal issues arising from services rendered.

A well structured umbrella company will operate within the guidelines of HMRC and will provide some tax benefits. Some also offer special dispensations for expenses incurred as part of your job. A contractor or freelancer becomes an employee of an umbrella company yet they retain the flexibility to choose who they work for, as well as their rates and terms and conditions of work. An umbrella company is, in effect, the means to provide tax reductions, autonomy and a way to gain benefits should one choose not to go self employed or trade through a limited company.

The Association of Professional Staffing Companies (APSCo) has finally claimed lobbying victory against the government to ensure that the Limited Company opt-out option is not removed from the new Conduct Regulations.

Contractors who operate through limited companies or umbrella companies currently have the opportunity to opt-out of the Conduct of Employment Agencies and Employment Business Regulations and the government’s decision to remove this option has been widely feared as it would have meant significant additional costs for recruiters and contractors.

Needless to say, the announcement that the opt-out will not be withdrawn has come as a huge relief for Employment Agencies and Businesses alike.

Companies Act 2006 came into force on October 1^st, 2009 and will bring with it long awaited changes to company law. One of the most prominent changes will be the alteration in purpose and prevalence of the memorandum of association. The Companies Act 1985 positioned the memorandum of association as an important constitutional document that provided external sources with key details about the company, from its name and company objectives to member’s liability and share capital.

Starting from October 1^st 2009, the memorandum of association will simply be used to record individuals who want to form a company, agree to become members and take at least one share each. For existing companies practising under the rules of Companies Act 1985, documented requirements of the company should now be reviewed and updated to adhere to Companies Act 2006 which now places the articles of association at the fore (every company must have articles of association). Although not a legal requirement, it can often be in the interest of the company to review statements based on them in the memorandum of association that could now restrict the company or prove detrimental, as the memorandum is quickly becoming irrelevant.

The emphasis on the importance of supporting small businesses coincides with the introduction of Companies Act 2006, which is believed to bring useful benefits such as the use of service addresses for company officers, a flexible and responsive register and increased protection for companies with regards to filing. The primary objectives of the 2006 Act are; to enhance shareholder engagement and a long-term investment culture, ensure better regulation, make it easier to set up and run a company and provide flexibility for the future.

Any new business owner has the opportunity to set up a limited company and this is more often than not the most tax efficient way to work. A limited company can provide protection for its owner by dividing up any debts incurred by the business based on each owner’s or associates’ share. If the limited company incurs significant loss, the owners’ liability is limited to their personal investment capital.

A limited company is well suited to any individual setting up a business, whether you are starting your business alone, from home, or with shareholders. Starting a limited company can be extremely simple and does not involve heavy investment.

The aim of a limited company is to provide the business owner with high level legal protection against heavy debts. A limited company can also raise its own funds by offering the sale of shares. Those who buy shares will in turn receive a portion of any profits the company makes. The larger the shares bought, the greater their financial return or loss.

Umbrella companies can be less hassle than limited companies, but at what cost? Choosing an umbrella company is often easier, but isn’t usually the most tax efficient way of working.

When working through an umbrella company, all tax and National Insurance is deducted before you receive your pay. Many first time contractors choose to trade through an umbrella company as this way of working is associated with simplicity and speed; however some contractor accountants can make the set up and maintenance of limited companies quick and hassle free.

An umbrella company is ideal for short term contracts and can keep the finances of individual contracts self-contained. If you decide to work through an umbrella company your salary will be subject to full PAYE Tax and National Insurance which will have negative financial implications. Another point to consider is that you will be reliant upon the umbrella company to collect your money from the client or agent and then to pay it for you.

Ultimately the decision comes down to your own personal choice and you will need to weigh up what is most important to you – taking home less money through an umbrella company vs. more time spent managing and directing a limited company.

When you engage Churchill Knight & Associates Ltd as your accountant you will be advised on your best option, dependent on your personal circumstances.

It is important to ensure that you hire a specialist contractor accountant who is aware of all legal requirements and obligations associated with running a limited company.

It is ultimately the director, i.e. you, who is responsible for making sure all legal documents are submitted to the correct authorities accurately and on time, however when you engage Churchill Knight & Associates Ltd as your accountant, they will assist you.

The principal benefit of trading through a limited company has always been the limited liability bestowed upon the company’s directors and shareholders. Assuming that the company is operated legally, the director’s personal assets are not at risk and shareholders are not liable for debts and obligations of the firm beyond the amount contributed.

A change to legislation over the last few years has meant that limited companies could potentially prove far more beneficial to self-employed individuals despite the higher running costs.

First time contractors usually choose between a limited company and an umbrella company. The only viable umbrella option is to use a PAYE Umbrella Company, which means all income is paid similarly to that of a contractor caught by IR35, which in turn can have a negative financial impact. Having said that, running a limited company comes with greater responsibilities than working through an umbrella company, and as company director, you are in control and make all decisions on behalf of the limited company.

Once a limited company is incorporated, the director or shareholder can begin trading whenever they like.

As the name ‘Umbrella Company’ implies, contractors receive a level of protection when working in this way. The independent contractor is legally considered to be an employee of the umbrella company itself.

If you use an umbrella company, you will be required to send your timesheets to your umbrella company who will then invoice your client or agency directly. An umbrella company will run payroll, send you your take home pay and deal with any applicable paperwork for you.

All umbrella companies are governed by HMRC, which means that your take home pay should be the same whichever umbrella companies you choose, allowing for differences within their fees. It is essential that you always deal with a reputable umbrella company as they are responsible for the payment of your tax and National Insurance contributions.

An umbrella company is most commonly used by contractors working under a short-term contract.

Setting up a limited company can be easy, as long as you choose the right provider. By choosing the limited company option, your company and personal finances are kept separate.
All limited companies must be registered at Companies House and companies are required to submit an annual return each year as well as annual accounts.
A limited company is owned by its shareholders, i.e. you. A limited company is run by the director (also usually you). Therefore, you maintain full financial control at all times.
Contractors working through a limited company are often perceived as a more stable partner to engage with. This means that if you are eyeing a very big contract, you are more likely to get it if you are applying as a company rather than an individual.
Limited companies are often more tax efficient than other business structures, which may also mean an increase in your take home pay.