Getting the most out of your new contract will mean figuring out how to comply with all tax and immigration laws, while avoiding as much redundant admin as possible.
The best way to get started on that is to do your research and fully consider your options. One consideration you’ll need to make is comparing Ltd and Umbrella Companies for contracting in UK.
Handling personal arrangements when taking on a contract in UK
For a lot of contractors, working in UK is a big move. What about accommodation? What about language or cultural barriers? What about simply finding your way around and existing in an unfamiliar environment?
You might even be bringing a spouse or family, leaving you little time to also sort out complicated legal and financial issues.
Contracting taxes in UK
As you can see with our calculator comparing Limited and Umbrella Company earnings in the UK, once your earnings are over about £250 per day, Umbrella Companies will give you the highest retention of your net earnings. This becomes even more apparent as your earnings increase.
For example: at £250 per day (£65,000pa), a contractor using an Umbrella Company will receive just over 6% more per year than if they used their own Ltd company. That translates to £4,000 per year, which is significant. But at £500 per day (£130,000), the disparity is huge - Umbrella Companies deliver an extra 19% for the contractor (more than £500 extra every week).
Common problems for UK Ltd Companies in UK
As a contractor, you likely already know about service companies. This type of company works through a limited liability personal company. UK contractors with contracts in the UK often use this option.
However, IR35 rules make this more difficult than it once was. For contracting in UK, it can be extremely challenging to use a UK Ltd company to handle the contract. When you setup a Limited Company, even if you use accountants for it, you become the company director. This means you have sole responsibility (and liability) for running that company. Every tax return you file and every annual report you submit will be signed on your authority. What this means is you can't ever really be freed of administrative tasks with a Limited Company. Using a Limited Company management service takes alot of the drudge work out of it and the top accountants will give you a breakdown on how to process every invoice you receive as well as automated reporting, but you still need to keep track on what is going on. If a mistake is made, for example filing a return late or miscalculating the tax you owe, the HMRC holds you personally accountable. We estimate the administration at about 72 hours per year.
Simply registering for social security and local payroll taxes is a complex operation, which isn't exactly practical for a single contractor. Rather than simplifying your admin, using your own Ltd Company can just spawn even more issues (see our rundown of the advantages and disadvantages here).
Setting up a Ltd Company in UK
Another option is to set up a local Ltd Company in UK. However, be aware that directors of Ltd Companies in UK are subject to a litany of laws and regulations.
Trying to comply with all of these regulations can seriously distract from your current contract – this can jeopardize your earnings (not to mention your sanity).
Using a Umbrella Company in UK
A better option is to work through an Umbrella Company. You’ll essentially be outsourcing the admin and tax issues to specialists.
Umbrella Companies are setup to keep the individual contractor removed from running the company. Depending on the structure you will likely not hold any official office above shareholder. This means your only true responsibility is to submit your timesheets. Without them you can't get paid! You may also choose to submit expenses which reduce your taxable income. If your Umbrella Company is one of the few that doesn't file your tax returns for you, then you'll have to do this once a year. We estimate the administration at about 5 hours per year.
Perhaps this option’s biggest disadvantage is the fact that the company will charge a fee. However, you’ll likely end up saving more money in the long run: you’ll be able to focus on your contracts, expertly reduce your tax liability, and comply with all laws and regulations (which means avoiding fees, fines, or even worse penalties). When you compare Ltd and Umbrella Companies, the latter generally ends up saving you more in the long run.