We understand that as a contractor you can find yourself asking a lot of questions. And we’re absolutely fine with that, as we’re here to answer them for you. A question we are often asked is, “what’s better, Limited Company or umbrella payroll model?”
Our simple answer to this question is “whatever option is best for you”. Both options have their respective pros and cons, and the team at Mortimer Childe will provide you with a first-class service regardless of which option you choose. But essentially, we will encourage you to go for the option that you’re most comfortable with.
A lot of first time contractors tend to opt for the umbrella option due to the simplicity of the model. There’s very little admin for you to complete and you receive your payments directly into your account after tax deductions have been applied. On the other hand, if you’re comfortable taking on some monthly admin tasks in order to achieve a higher take home percentage from your contract, our Limited Company service might be the best option for you.
To help you with your decision making we have produced the table below which provides some useful comparisons between the two options. You can also find plenty more information in our FAQ section further down the page.
Umbrella Service |
Limited Company |
|
|
Very quick set up process. Simply complete the Mortimer Childe registration form and we take care of all other arrangements. You can be set up with our umbrella service on the same day if required. |
Set Up Process |
Setting up a new Limited Company can take a few weeks. Whilst most things can be set up quite quickly (1 or 2 days), the Limited Company bank account usually takes the longest period of time (2 – 3 weeks). |
|
Depending on how much you earn, this is a less tax efficient approach compared to a Limited Company as there are no tax planning options to help increase your take home pay. |
Take Home Pay |
This is likely to be the most tax efficient option due to the greater flexibility to reduce your tax liability and retain more of your contracting income through more favourable payment options. |
|
Very little administration responsibilities which can be a big ‘plus’ for many contractors (if admin isn’t your thing). Timesheets and expenses claims is the only admin you’ll need to complete (and these are managed through our online portal). |
Paperwork & Administration |
You have responsibilities as a Company director which include creating and maintaining accurate records for your Limited Company. Mortimer Childe will assist you with this to reduce the burden on you. |
|
Very simple as all tax and national insurance calculations are processed through our payroll system where tax is deducted at source. There’s no need to complete a tax return or use an accountant. |
Tax Calculations |
You have the opportunity to manage your tax liability more flexibly through a combination of a salary and dividends (which will be managed by a qualified accountant). |
|
Whilst you will receive reimbursed expenses (if this has been agreed with your agency / end client), these can’t be off-set against your tax liability to increase your take home pay. |
Expenses |
You can offset legitimate business expenses against your tax liability to increase the amount you take home from your contract value. |
|
Once we have received payment from your agency / end client, your payment will be made directly into your bank account. |
Payment Process |
You are responsible for raising and sending invoices to your clients and managing the Company bank account (although an invoicing service can be provided if required). When withdrawing money from the Company, you are required to manage the tax and national insurance payments. |
Very quick set up process. Simply complete the Mortimer Childe registration form and we take care of all other arrangements. You can be set up with our umbrella service on the same day if required.
Setting up a new Limited Company can take a few weeks. Whilst most things can be set up quite quickly (1 or 2 days), the Limited Company bank account usually takes the longest period of time (2 – 3 weeks).
Depending on how much you earn, this is a less tax efficient approach compared to a Limited Company as there are no tax planning options to help increase your take home pay.
This is likely to be the most tax efficient option due to the greater flexibility to reduce your tax liability and retain more of your contracting income through more favourable payment options.
Very little administration responsibilities which can be a big ‘plus’ for many contractors (if admin isn’t your thing). Timesheets and expenses claims is the only admin you’ll need to complete (and these are managed through our online portal).
You have responsibilities as a Company director which include creating and maintaining accurate records for your Limited Company. Mortimer Childe will assist you with this to reduce the burden on you.
Very simple as all tax and national insurance calculations are processed through our payroll system where tax is deducted at source. There’s no need to complete a tax return or use an accountant.
You have the opportunity to manage your tax liability more flexibly through a combination of a salary and dividends (which will be managed by a qualified accountant).
Whilst you will receive reimbursed expenses (if this has been agreed with your agency / end client), these can’t be off-set against your tax liability to increase your take home pay.
You can offset legitimate business expenses against your tax liability to increase the amount you take home from your contract value.
Once we have received payment from your agency / end client, your payment will be made directly into your bank account.
Q. What is IR35?
Introduced in 2000, IR35 legislation is used to determine the employment status and the subsequent tax status of an individual. Depending on your contractual arrangements and working practices you will be determined as either inside or outside of IR35. If you are deemed inside IR35 your tax status is essentially one of a typical employee whose taxes should be deducted at source and paid to HMRC. If you are deemed outside IR35 you will have the opportunity to operate through a Limited Company where your payment arrangements are more flexible, giving you the option to receive dividend payments. It is important to note that in checking the IR35 status, both the contract and working practices must be reviewed and as such, it’s important you take professional advice on this matter.
Q. What is Supervision, Direction and Control (SDC)?
Supervision, Direction and Control (SDC) is a very significant term for contractors to be aware of. It essentially refers to the interpretation of a contractors working arrangements on whether they perform their work under the supervision, direction and control of another person. Determining whether SDC does or doesn’t apply to a contractors working arrangements will help to determine if they fall inside or outside of IR35 (which will then determine your contracting options and tax status).
Q. What is a PSC?
The term PSC refers to Personal Services Company. Essentially, this is just another term for a contractors Limited Company.
Q. What does AWR stand for?
AWR refers to the Agency Workers Regulations which came into effect in October 2011. The legislation was brought in to prevent the unfair treatment of people who work through agencies by giving them rights to certain entitlements, including paid annual leave, rest breaks, limits on working times, payment at National Minimum Wage, no unlawful deduction of wages, discrimination rights under the Equality Act 2010 and health and safety protection at work. Some rights are afforded to the worker from day 1 of their contract assignment. Other rights (such as payment that matches a comparable employee) are afforded to the worker after they complete a qualifying period of 12 weeks.
Q. Why are some public sector contractors forced to use an umbrella company?
If you are a contractor who works for a public-sector client it is likely you will be required to use an umbrella company for your contracting / payment arrangements. This is due to reform in legislation introduced in April 2017 which made public sector bodies responsible for any un-paid taxes by contractors operating through their own Limited Companies whilst working on public sector contracts. Due to the associated risks many public sector bodies now insist their contractors use PAYE umbrella providers where their taxes are paid at source, reducing the risk faced by the public sector entity for unpaid taxes.
Although you are regarded as a ‘contractor’, you are in fact employed by the umbrella company as an employee who works on temporary work assignments, usually arranged through a recruitment agency. Mortimer Childe agrees a contract to supply your services to the agency and receives payment for your services at agreed periods (usually weekly or monthly).
Yes, as an employee of Mortimer Childe you have full, continuous employment rights which gives you access to statutory entitlements such as sick pay, maternity pay / paternity pay, holiday pay, etc. You might not be given this status if you choose to work through a recruitment agency on a PAYE basis, so the umbrella model is a more favourable option for contractors.
No. As a Mortimer Childe employee you will be covered by our company insurance package which includes Public Liability, Professional Indemnity and Employers Liability cover. Some contractors might require additional levels of cover depending on the type of work they do and the duties they need to perform, but any additional cover can be arranged through Mortimer Childe.
No, by using our umbrella services we will raise and send invoices on your behalf. All you need to do is send us a timesheet to confirm how many days / hours you have worked and we take care of the invoice arrangements. You might not even need to send us a timesheet as most agencies will let us know your timesheet details once they have received your approved timesheet from the client you are working for.
Part of the pay rate you have agreed with your agency is intended to cover your statutory annual leave entitlement. If you want to, you can ask Mortimer Childe to retain your holiday pay so we can make the payment to you when you take time off from your contract assignment. Alternatively, you can receive your holiday pay as part of your weekly / monthly payment so you have the funds in advance. Either way, your payslip will clearly tell you how much has been paid to you as holiday pay or how much we have added to your holiday fund.
It is standard practice for umbrella companies to pay their contractors through a combination of a basic salary (based on national minimum wage) and a commission or profit related bonus payment. This is largely because the contractor is employed on an overarching contract of employment where he or she could work on multiple assignments and have a number of different pay rates. It is therefore more practical for the umbrella company to use a single pay rate using the national minimum wage and process the rest of the wages as a commission payment. Please keep in mind that it isn’t a commission payment in the true sense of the word, it is just the term used for payment purposes. Please also keep in mind this doesn’t have any effect on the amount of money you are due to be paid; it’s just a slightly different way of calculating the payment.
Another reason for this payment structure is due to the obligations of the umbrella company. If the end client / recruitment agency you work for doesn’t pay your wages to Mortimer Childe, we (as your employer) are required to make a payment to you. In such circumstances you would receive your salary payment (i.e. the amount you receive at national minimum wage). You will then receive the remaining funds (i.e. the commission payment) once Mortimer Childe receives the payment from your agency / end client.
The rate you agree with your recruitment agency / end client includes an amount to cover the Employers NI contributions that needs to be made to HMRC. As your employer, it is Mortimer Childe who is legally required to make the deduction and pay the Employers NI contributions to HMRC. This is a standard process that is performed by all compliant umbrella companies.
Yes, you will have continuous employment with Mortimer Childe from the time you start to the time you leave. Although you have one employer you are entitled to work on multiple assignments through different agencies should you wish to.
Yes, if you incur genuine business expenses whilst performing the duties of your contract assignment you will be entitled to be reimbursed for these (as long as your agency / end client have agreed for the expenses to be paid to you and you have provided all of the necessary documents/receipts to support your claim).
During the on-boarding process we will make sure you know what payment terms your agency / end client have agreed to (i.e. how many days until they make payment to Mortimer Childe after we have sent them an invoice for your services). We operate multiple daily pay runs and we will always make payment to you on the same day we receive payment from your agency (as long as the funds are received before the final payroll cut off).
Yes. As an employee of Mortimer Childe you will have access to the services of Perkbox, a leading employee rewards provider where you can access hundreds of pounds worth of discounts on your typical day-to-day purchases. Mortimer Childe employees save c£700 per year by using this service.
Yes, we operate a company pension scheme which you are entitled to take part in. Details of the pension scheme will be provided to you during the registration process.
We deduct our company margin from the payments we receive for the services you provide as a contractor. Our margin is fully inclusive and covers all aspects of our services (including the public liability and professional indemnity insurance you are required to have in place). There are no hidden costs, we won’t charge you for same day payments and we only apply the company margin to the weeks / months when you work. We have service agreements in place with recruitment agencies throughout the UK where we offer their contractors a discount to our standard margin. This enables us to offer one of the most competitively priced umbrella payroll services on the market. Please speak to a member of our team for more information.
Yes. You can pick whatever name you want (within reason) as long as the Company name isn’t already registered with Companies House. The team at Mortimer Childe have plenty of experience helping contractors find the perfect name for their Limited Company, so feel free to ask for our assistance if you need any help. Once you have made your decision we will form your Company in that name and register it with Companies House.
Very quickly. Most actions can be completed on the day you choose to set up your Limited Company and you should be ready to trade through your Limited Company in 2 – 3 days.
You will need to provide your personal details (address, date of birth, NI number, etc). We will also require your trading / correspondence address, a certified copy of your passport or driving license and proof of address. This is to comply with Anti Money Laundering Regulations.
Yes, we can register the Company for VAT and PAYE. We also register Mortimer Childe as your Agents which allows us to deal directly with HMRC on your behalf.
Your business is not required to be VAT registered until turnover exceeds £85,000 but you can register voluntarily if turnover is below this limit. In most cases it’s preferable to be VAT registered. Again we can discuss what will suit you best when you sign up with us, but rest assured we will do all the registration for you.
We do. We prepare your VAT return on a quarterly basis and provide you with a copy for approval before we file online. You will then make arrangements for the payment to be made from your Company bank account. Mortimer Childe can set up a direct debit on your behalf to save you worrying about making payment.
No. Unlike other services who expect you to administer your own Limited Company, we carry out all your administration for you. You just need to concentrate on your day job whilst we do the rest.
In addition to the reimbursement of expenses you will receive a regular salary which will be tailored to meet your personal needs. You will also receive dividend payments which we will base on your level of income and your personal requirements. You can transfer these amounts from your Company bank account to your private bank account. They should always be made as separate transactions. Once you have signed up we can tailor your payment schedule to your needs.
A dividend is a sum of money paid by a Company to its shareholders out of the Company’s profits or reserves. As dividend payments attract a lower rate of income tax and are not subject to National Insurance they are a tax efficient way to draw funds down from a Limited Company.
As part of our service you will receive management accounts for your Limited Company that show the companies profit and how much is available for distribution via dividends. You will notify your account manager how much you wish to draw as a dividend payment before the agreed amount is paid into your personal account. Mortimer Childe will also advise of any personal tax liabilities associated with these dividends.
You are able to draw money from the Limited Company whenever you want, although we recommend funds are drawn in the form of a salary as per your payslip, expenses in line with your expense claim form and dividends as advised by your Mortimer Childe accountant.
In order to protect yourself and your Limited Company it is essential you purchase the necessary level of insurance cover. As a director of your own Limited Company, it is essential that you check all contractual obligations and ensure you have sufficient Employers Liability, Public Liability and Professional Indemnity insurance. Mortimer Childe can put you in touch with an insurance company who will be happy to provide a quote.
A Director’s Loan is when you take money from your Company that isn’t a salary or dividend or expense payment and you’ve taken more than you’ve put in. You must keep a record of any money you borrow from or pay into the Company. This record is usually known as a “Directors Loan Account”.
Under normal circumstances your accounts are due to be filed with HMRC within 12 months and Companies House within 9 months of your period/year end. We do everything to prepare for this including managing deadlines. We will talk through your accounts and get authorisation from you prior to filing so you have a full picture of what is being reported.
These are benefits or ‘perks’ which employees (or directors) receive from their employment but which are not included in their wages. Typical examples are Company cars and private medical insurance. Benefits in kind are taxable based on the taxable value of the benefit (i.e. the amount it costs the employer to provide you with the benefit).
Yes, the team will give you as much notice as possible. As long as you provide the required information to us in a timely manner your tax payments can be made in full and on time.
Yes, and we will do this for you. The return is due by 31st January each year. We will take you through what is required, fully complete your return and then file it after you have authorised it. We will ensure that you meet the deadline and don’t incur any unnecessary penalties.
This is dependant on the terms you have agreed with the end client or recruitment agency you are contracting with. You must make sure you have agreed acceptable payment terms as part of your contractual paperwork prior to starting your contract assignment.
Yes, HM revenue and Customs allow you to claim an allowance of 45p per mile for the first 10,000 miles in the tax year and 25p per mile thereafter. You have to keep detailed records of each journey but you do not have to keep receipts for petrol/diesel/car repairs etc. We can take you through the process to make it as painless as possible.
This depends on the nature of your business. Generally you can claim for mileage, travelling, telephone bills (if in your company name), advertising, printing, stationary, internet, business bank account charges, public and employer’s liability insurance, expenditure on equipment, subsistence costs, wages paid to employees and our fees. We can talk through your typical expenses and work out the full extent as to what you can claim for.
It is recommended you keep records for 6 years after the Company’s financial year end.
Each month you will need to send us your bank statements, copies of sales invoices and any expense forms you have, we will sort these and ensure that they are properly dealt with.
Our flat fee is £120 per month + VAT. You can offset our fees as legitimate Company costs so the actual costs are far less in real terms.
Contractors often consider themselves to be self employed when using their own Limited Company. However, as you are employed by the Limited Company your employment status is that of an employee.
Yes, we will assess your situation to establish if being self employed and operating as a sole trader is the best option for you. If it is we will provide you with all the support you require to operate as a sole trader.
If you have a period where you don’t work as you are between contracts we can arrange for your Limited Company to be made dormant. You won’t pay any monthly fees during this period.
Yes, and there are some benefits to having additional employees which we will discuss with you.
Yes, there are a team of qualified accountants who you can talk to or meet.