For more in-depth information, including a range of other factors, we have got a handy guide to help you decide here.
An Umbrella Company is often where a freelancer will first dip a toe into the world of contracting. It is quick to register, requires very little administration and is particularly suitable for short-term contracts.
The Umbrella Company acts as your employer, so even though you are contracting, you are classed as a permanent employee in the eyes of HMRC. The Umbrella is responsible for all taxes, levies and deductions from your pay – you will only ever receive your net take-home pay. Because of this, there is little flexibility in how much you can take home (although in certain circumstances you can claim limited expenses to reduce your tax liability).
As well as their own margin, an Umbrella will deduct PAYE tax, National Insurance, Employer’s National Insurance and the Apprenticeship Levy. They are also responsible for pension and holiday pay deductions, as well as Student Loan payments. Once all this is taken care of, you can expect to take home 60-65% of your contract income, depending on your rate.
Watch out! Since all employers calculate pay in the same way, any Umbrella claiming to offer substantially higher take-home pay is likely to be non-compliant and putting you at risk of a tax bill in the future.
Once established or committed to a long-term career in contracting, the vast majority of freelancers set up a Limited Company to handle their income. The main reason is simple – although requiring a bit more admin, the tax advantages mean that a much greater proportion of your hard-earned money ends up in your pocket.
A Limited Company is a separate entity to you – you act as sole Director of the company. With a good accountant, there are ample opportunities for tax planning. Income is typically split between salary and dividends, in a tax-efficient manner. There are also a wider range of allowable business expenses, which reduce your tax liabilities further – see our contractor expenses guide for more information.
A contractor operating through a Limited company can expect to take home 75-85% of their contract income – there is more variation depending on your circumstances and working patterns, but even with minimal expenses it is a more tax-efficient way of working.
Watch out! If you’re contracting in the public sector or working in the same manner as an employee, you could be caught by IR35 legislation. This can have a negative impact on your take-home pay.
For a guideline on what you could take home, check out our online pay calculator. For a bespoke calculation, or just for a bit more information, give one of our specialist contractor accountants a call on 01442 795 100 or drop us a line at email@example.com.