Limited Company or Umbrella Company?
There are two viable options when operating as a freelancer through a recruitment agency.
An Umbrella Company:
By engaging with an umbrella company the fee earner effectively becomes an employee of that umbrella Company. Fee Earners normally submit time-sheets to the umbrella company who will in turn, invoice the end client/agency for the work done by you. You will then be paid as a PAYE employee less the umbrella fee.
You will usually be allowed to claim some basic expenses such as mileage and other expenses that you could claim as a normal employee.
However the key difference from being a normal employee is that you will be paying both employers (12.8%) and employees (11.00%) National Insurance!
You’ll typically take home below 65% of your contract pay by working through an umbrella company, depending on the hourly rate.
A Limited Company:
The fee earner will form a limited company of which you will normally be both a director and shareholder. The company will then engage with the service provider/agency.
As a director of the company you are an employee and can receive monies via PAYE. However, as you are also a shareholder you can benefit from the receipts dividends. It is through payments of dividends and the ability of the company to claim a wider range of expenses as tax deductable that large savings are made. These savings equate to a significant increase in your tax after take home pay.
You will typically take home around 75% - 80% of your contract pay by working through your own limited company, depending on the hourly rate.
What is IR35 and how does it affect you?
What is IR35?
IR35 legislation was introduced by the government to ensure small companies such as contractors operate in the correct manner. In short, they expect to see the same level of risk, responsibility, liability and control that is evident with directors of “traditional” limited companies. The risk of IR35 is at its highest if there are no differences in the terms of contract and working practices between you and permanent member of staff.
What does IR35 do?
If you are caught by IR35 legislation broadly you will have to pay tax and National Insurance as if you were operating under an umbrella company. This is because HM Revenue and Customs believes that as you aren’t taking the financial risks or have the same level of control as a director of your own limited company, you aren’t entitled to the same corporate tax structure.
How does IR35 compare to an Umbrella Company?
The tax position between the two is very similar. However inside IR35 you can still claim: travelling and accommodation expenses, 5% of your turnover for non-direct expenses (accountancy etc), potentially still benefit from the VAT flat rate scheme and receive interest on the funds held within your own company.
So from a tax perspective there are still some savings to be had, especially for higher earners.
More information on IR35
Professional Indemnity Insurance
For contractors, professional indemnity insurance covers you in the unlikely event that you have made a mistake, or are deemed to have been negligent, in carrying out your business. It is used by most of the professions in the UK that offer advice to clients.
A wide range of insurance policies, are available to protect contractors in the event of an accident at work, or claims against them for negligence which will provide you with complete cover and peace of mind.
The policy will also cover the cost of fixing any mistake on your part, therefore avoiding a larger claim being made.
Public Liability insurance
Public liability insurance will cover you if someone is accidentally injured by you or your business operation and will include cover in the event that a third party makes a claim for compensation against you.