Accountancies often promote the tax advantages of forming one’s own limited company. In addition, these companies are advertised as being more advantageous to contractors than are umbrella companies. Whilst these اقامة مستثمر في دبي do offer tax benefits for some contractors, for most, the truth is they do not offer significant tax savings for the typical contractor.
First, consider what would happen to a contractor who does not set up a limited company, and instead uses the services of an umbrella company. Take a typical contractor who, for example, earns £40,000 per annum. £7,475 of this amount is tax-free because every contractor in the United Kingdom is entitled to this allowance. This contractor’s earnings, £35,525, place him in the 20% tax bracket, which would reduce his take-home pay by another £6,505. Ultimately, the contractor is left with £26,020.
The common misperception is that if a contractor takes the pay as dividends by using a limited company, then the contractor will take him more pay than if they acted as a PAYE employee or used an umbrella company to receive their pay. However, if they instead take their pay as dividends, the dividends are not taxed, but they are instead subject to the Corporation Tax, which takes off the same 20% as the income tax, leaving the contractor with the very same $26,020. Up to this point, the amount of take-home pay a contractor using the services of an umbrella company and the pay a contractor acting as a limited liability company receive are the same.
Clearly, the idea of these companies being more “tax efficient” is a complete myth. In addition to paying the same in taxes, individuals forming limited companies will also have to pay the following costs: At the minimum, contractors using the services of such companies face an additional £1050 in expenses per annum, up to a maximum of around £2360. Taking the figure right in the middle, £1705, and the contractor who receives annual pay of £40,000 loses about 4.2% of his pay to business expenses.
From a tax efficiency perspective, while limited companies are often promoted, they don’t make sense. Keep in mind the average umbrella company charges £100 per month, or £1200 per annum. Compare this figure to the £1705 estimated figure for the typical limited company, and combine it with the fact these companies require much more time and effort to set up and manage, and they simply don’t make much sense for the average contractor. Limited companies do have unique situations where they work well, but for individuals committed to working as a contractor, umbrella companies keep things simple and relatively cost-efficient.
