Would you take home more pay as a limited company contractor?

Would you take home more pay as a limited company contractor?

Nov 10, 2017

If you’re an employee of an umbrella company it may be worth finding out if the way you work lends itself to contracting through your own limited company.

Most limited company contractors will take home more of their pay because they are taxed differently. You can find out how much difference it would make to you by using our Contractor Calculator. Simply enter your hourly rate and the number of hours you work each week to compare take-home pay between limited company contracting and umbrella company contracting.

Working out your pay as a limited company contractor

As a limited company contractor, your take-home pay may be higher than any other contractor working option, partly because of the way your income is treated.

By contracting through your own limited company (or Personal Service Company which is a type of limited company which is well suited to contracting), you’ll be able to claim tax relief on legitimate expenses.

At the end of your financial year you’ll pay corporation tax on any profits you declare (20% for companies with profits under £300,000) and then dividend tax on any dividend you take from your company. You’ll still be entitled to your tax-free personal allowance of £11,500.

Working out your pay as an employee of an umbrella company

If you work as an employee of an umbrella company, you will be taxed as an employee. This means you’ll still be entitled to your tax-free personal allowance of £11,500 but then will pay income tax on your earnings at the standard income tax rates and bands.

Umbrella company employees are more restricted when it comes to legitimate business expenses, so you may find, for example, that you cannot claim mileage for some work-related journeys.

Making the right choice

Of course, take-home pay is only one consideration when deciding which working option is best for you in your career as a contractor.

While your take-home pay may be higher as a limited company contractor, you may not like the administrative burden which comes from running your own company.

Equally, the fact that umbrella working allows you to enjoy employment rights such as sick pay and maternity rights and a pension may mean that the benefits outweigh the difference in your take-home pay.

You may find it helpful to read our article on the pros and cons of limited company contracting, or to download our Guide to Contracting Successfully with Crest Plus.

If you would like to discuss your working options in more detail with a member of our team of specialist contractor accountants, please get in touch. Whether you’re new to contracting or have been contracting for some time and want to check you’re using the best working option, we’ll be pleased to help.

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