The Pros and Cons of Contracting Trading Options

Which option is right for you?

First ask yourself the following questions:

  • Is contracting a short-term or long-term decision?
  • Do you want to establish yourself as a brand?
  • How much time and resource do you have to spend on the administrative side?
  • How much money do you expect to earn?
  • What are your clients expectations?

Take a look at our list of pros and cons of the four different trading options for contractors in the UK:

Pros Cons
Limited Company
  • The most tax efficient way of working
  • Claim a wider range of expenses
  • Higher take-home pay
  • Lower personal financial risk if things go wrong
  • Tax planning opportunities to save money
  • Access to the Flat Rate VAT scheme
  • Favourable option with clients
  • Easier transfer ownership
  • You can establish your identity as a brand
  • Easier to raise investment
  • A lot more time consuming and intensive
  • Greater statutory obligations
  • Higher costs and penalties if you don’t meet statutory obligations
  • More responsibilities and duties under the Companies Act 2006
Sole Trader
  • You keep all the profits of the business
  • You are in full control without having to consult other directors or shareholders
  • No set up costs as you don’t need to register at Companies House
  • Everything about your business is kept out of public records and is totally private
  • The accounting process is much simpler for a Sole Trader than for a Limited Company
  • Minimal administration due to fewer statutory obligations
  • Less take-home pay compared to a Limited Company, from an equal turnover.
  • You are personally liable to pay tax on all income earned.
  • Your own finances and possessions may be at risk if things go wrong.
  • Raising funding can be more difficult as you appear less established and less able to repay.
  • Clients prefer the status of working with limited companies.
Umbrella Company
  • Easy set up as you only need to submit your time sheets and then wait to get paid
  • All tax and NI is deducted before you receive your money, so you will have no further taxes to pay
  • Ideal for short term contracts or if you’re really just in between permanent jobs.
  • Flexibility to choose the projects you want to work on, whilst retaining employment with your umbrella company.
  • Ability to claim certain expenses
  • Someone else will be doing the paperwork for you
  • Ideal for contracts less than £25k per year
  • You are reliant on the umbrella company to collect your money from the client and then to pay it to you.
  • Lower earning potential
  • Not as tax efficient as a Limited Company
  • You are unable to create a brand identity to build your reputation in the marketplace.
Recruitment Agency /PAYE
  • Very little effort required as you only need to complete timesheets
  • Less risk of not being paid as the agency is ultimately responsible for paying you
  • Higher Tax
  • Tax relief on expenses can’t be claimed
  • The hourly rate offered is often lower than other options
  • You could be perceived as inexperienced in the marketplace
  • You are unable to create a brand identity to build your reputation

Finding an accountancy partner to help you

Your options may seem daunting, but there is no reason why you should do everything by yourself. A good accountancy partner will advise you on the right route to take, so that you can grow and develop in line with your circumstances and your future goals. An accountancy partner you can trust and rely on, such as Square Mile Accounting, will give you the freedom to focus on your business with the peace of mind that your finances are under control.

If this overview has been enough to convince you and you’d like to set up now please get in touch with us.
Alternatively you can call us on: 0203 282 7109

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