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Self Employed or Umbrella Company ???

Discussion in 'Web Design Forum' started by slimboyfatz33, Apr 30, 2008.

  1. slimboyfatz33

    slimboyfatz33 New Member

    I am about to begin a fairly long term contract with a client and was unsure if to stay 'self empoyed' with a contract with the client, or go through an 'umbrella' company. The only snags i see with an Umbrella is that my current Class 2 NI contributions go from a flat rate of around £9.00 per month to around £200 per month (of course because i am then classed as an employee!). If i am with an Umbrella company then how do i go about doing other work (ie; does this have to go through them, do i need to do my own taxes/ni for these other jobs??) , what type of contract would i need to draw up if i contracted directly with client i mentioned at the start, i know the taxman is very strict on 'contractors' at present, so i assume my contract would have to be watertight!!

    Any advice greatly appreciated, as my head is spinning !!
  2. mds

    mds New Member

    If the job is not permanent then i suggest you just work as a self employed and then tender your taxes yourself at the end of the financial year. You can sign a simple contract to execute a project for a client . It's all part of beng self employed. The only difference is that you will need to tender your taxes yourself at the end.
    If the contract is permanent, then you might consider taking it up as a full employment since it will give you an opportunity to recieve pension later in life. You can also do other jobs as self employed while fully employed. They are taxed separately.
    Last edited: May 1, 2008
  3. Jog On

    Jog On New Member

    if it's a good umbrella they will deal with your taxes and paye you through PAYE.

    If you go direct as self employed you need to do your own taxes - maybe talk to an accountant. The brolly will charge you a fee so you may be better off going self employed.

    HMRC are only really interested in contractors who operate through Ltd companies (like me) or who use MSCs (managed service companies) or other off shore tax schemes.

    It's a right merry dance I can tell you!

    The problem is that 99.9% of It contracts go through employment agents and if we were to operate as self employed then the agents who get us the work are liable foir employers NI of 12.8%

    Because of this the agents insist that we either:

    1. Go through umbrella companies who charge fees and pass on the 12.8% employers NI to the contractor. A popular albeit expensive option if you just want to contract and collect a paycheque without the hassle of forms and expense of an accountant.

    2. Form Ltd companies which means we have the option to pay ourselves as directors with dividends which are tax free up till about £33k a year (I think).

    The dividends are paid out of net company profit so everything after salary+expenses is taxed at the small company coporation tax rate of 21%

    So you get all these 1 man Ltd company contractors paying themselves minimum salary (any taxable income paid as salary is liable for income tax, empoyee NI and employer NI - which in the higher earnings bracket means you pay over 50% tax) of about £5k and the rest in divis which of course the revenue don't like at all.

    Also business expenses such as travel, lunch when at client site (subsistance), mobile phone, broadband can be written off against tax.

    So this is why Gordon Brown invented IR35 which - if it applies - means that 95% of the income derived from a contract is to be paid as PAYE (with 5% allowed for business expenses) if caught inside.

    So the options for Ltd company contractors are either pay nowhere near as much tax as permanently employed people - or pay just as much as permanently employed people + 12.8% employer's NIC on top of accounting fees, insurance and all the admin that comes with running a Ltd company.....

    .....all for no sick/holiday pay, no job security, pension or other benefits.

    Nice one Gordon! I'm going to enjoy voting conservative today :fight

    A popular option among contractors is to pay a token amount of taxable salary and not claim too many expenses so as to fly under the radar. This is the closest thing to middle ground there is.

    Also corp tax of 21% on company profits so they're not doing to too badly from us, however they feel we should pay more...

    So there's a brief overview of HMRC vs. contractors.

    If you have the option to go self employed I'd go for it - I only wish I had that option :( Then again being a Ltd company director does have its benefits. :glasses

    It might be a bit more admin for you so an umbrella could save you some headache but at a cost.

    One thing to watch out for with umbrellas - be wary of claims that they can enable you to earn lots more by claiming non existant expenses. It is a myth that you can claim x amount per day without any receipts.

    There is only one organisation I know of that will let you claim x amount per day with no receipts - no questions asked, and that is..... HMRC. Go figure :mad2
    Last edited: May 1, 2008

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