Is Umbrella Company the best solution for first-time Contractors?

There has been a rapid growth of self-employment in the UK labour market. As per the latest ONS figures, the number of self-employed has increased from 3.3 million people to more than 4.8 million. The numbers clearly indicate that self-employment represents a larger share of employment, which is up from 12% to 15%.

With more and more people joining the self-employed workforce and keeping in mind the upcoming IR35 reforms, it becomes even more important for Contractors to understand the best trading route and choose it wisely.

While many first-time Contractors may believe that the Umbrella Company solution would best suit them because it’s the easiest and most convenient way to become self-employed. It may not always prove to be the right way to go.

Whether to trade through a Limited Company or Umbrella largely depends on individual circumstances and there’s no one way to go about it. However, it’s generally seen that most first-timers start with Umbrella Company and transition to Limited Company should the situation demand.

From what we have seen and experienced, an Umbrella Company solution works best for those who are mostly on short-term contracts, earn less than £15-£20 per hour and for those who are not comfortable with paperwork and taxation. Contractors trading through an umbrella company can also claim employee benefits like holiday and sick-pay.

However, if you are looking at full-time and long-term contracting then, this may not be the best way to go. Especially if you would be earning more than £15-£20 per hour. In this case, a Limited Company solution may suit you the best as a first-time contractor. This may mean some extra paperwork and responsibility, but it would eventually benefit you more in the long run – meaning more take-home pay compared to an Umbrella Company solution.

Let’s now look at the last bit – ’taxation’.

When you choose to trade through an Umbrella Company, it becomes their responsibility to calculate and deduct Tax and NI (National Insurance) on a PAYE basis, since your earnings are paid directly to them instead of you. This for many Contractors may be the best solution since taxation hassles, responsibility and all the paperwork are handled by the Umbrella Company (P.S. – this could also mean a lesser take-home pay compared to the Limited Company solution).

When you are working through a Limited Company, you are your own boss. This means, all your earnings are directly paid to your Company’s bank account and you have all the freedom to choose the most efficient tax solution for a maximum possible take-home pay. Having said that, it also means that, it would become your responsibility to do all the paperwork and pay tax on time. This may not be ideal for many first-time Contractors since this would take some focus away from their core task i.e. Contracting. However, in the long run, this may be best suited.

Our two cents

Always seek professional advice before choosing the way forward. Experienced industry professionals can help you choose the best route, which may save you from future inconveniences.