Umbrella vs. Limited – which is the best option for me?

The three main options are to set up your own Limited company, go self-employed or work through an Umbrella company.

Self-employed is outside the scope of this guide – but briefly, it involves working entirely for yourself. You invoice under your own name or a trading name and account for all tax at the standard personal income tax rates. It’s a less popular approach in most professions as you don’t benefit from the preferential tax rates from operating a Limited company, and a company structure also protects your personal assets from losses, costs or legal claims.

What is a Limited company?

We have more detailed information elsewhere on our website, but briefly, a Limited company is a separate legal entity through which you conduct your business as director and shareholder. Since it’s a separate legal entity to yourself, the company has its own bank account and assets. Contracts are between your business and your client, and any profits and losses belong to the company.

The name Limited company stems from the concept of limited liability – meaning that the owner of the company cannot be held personally liable for any losses or debts incurred by the business. In the event that things go wrong, creditors can make claims on the assets of the business, but your own personal assets are protected.

There is a small fee associated with setting up a Limited company and registering it at Companies House, as well as several reporting requirements. Accounts must be submitted annually, alongside other administrative documents. There are also deadlines for paying Corporation Tax, currently charged at 25% of the company’s profits after all expenses are taken into account. 

What is an Umbrella company?

An Umbrella company acts as an employer for contractors on temporary contracts, typically working through a recruitment agency. It serves as a single employer throughout multiple contracts – contracts are between your clients and the Umbrella company, which pays you as an employee through the PAYE system.

As contractors sign a full contract of employment with an Umbrella company, they’re entitled to the full statutory benefits of employment – Statutory Maternity and Paternity Pay (SMP/SPP), Statutory Sick Pay (SSP), a pension scheme and holiday pay. Many Umbrella companies also offer additional employment benefits not required by law, such as insurance, private medical cover, access to counselling and welfare services, and reward & benefits packages.

Since Umbrella company employees are paid through the PAYE system, there are no additional reporting requirements – just like a permanent employee, all tax is deducted at source and declared to HMRC each time you’re paid.

When would a Limited company be suitable?

A Limited company is the most tax-efficient structure through which to conduct your business. You can pay yourself a combination of salary and dividends to benefit from the different tax-free allowances available for each, make tax-free pension contributions through the company and even leave funds in the business to extract in future years. A specialist contractor accountant, such as our sister company Dolan Accountancy will be well-versed in the optimal way to pay yourself through a Limited company, and will provide advice and handle administration accordingly.

Although it’s the most tax-efficient vehicle through which to be paid, a Limited company does come with a higher administrative burden than an Umbrella company. The best contractor accountants will be able to take some of this load off your hands, but you’ll still need to keep track of your income and expenses, including receipts and invoices, and provide the information required for the submission of your year-end accounts and tax return. This isn’t an enormous hardship, but worth being aware of if you’re the type of person who prefers to get on with their work with zero distractions!

The tax benefits of a Limited company disappear if you fall within legislation called the Intermediaries Legislation – commonly known as IR35 (see our introductory guide to IR35 here). If your working arrangements put you on the wrong side of IR35, you’ll pay tax and National Insurance at the same rate as a normal employee, despite the Limited company structure. If this is the case…

When would an Umbrella company be suitable?

 …you’re probably better off being paid through an Umbrella company.

Being paid through an Umbrella company is the lowest-admin option – the Umbrella company will invoice your client for your work on an agreed timescale (usually weekly), and process your payment through the PAYE system, accounting for tax and National Insurance. They’ll also take a margin each time you’re paid. You may need to submit a weekly timesheet, but that’s the extent of the work you’ll have to put in to be paid.

Umbrella companies are also suitable if you’re working on a short-term contract, or unsure if you’ll continue contracting long-term. Unlike a Limited company, which needs to be closed down if it’s no longer needed, you can simply end your employment with an Umbrella company if you no longer require their services. As with the end of all employment relationships, you’ll be issued with a P45 which you can take to your next employer.

Which is best for me?

If you choose to work through the Dolan Contractor Group, you don’t need to choose! If you set up a Limited company through us, we’ll allow you to switch between the Limited company and Umbrella employment at will, without any additional fees and with all administration taken care of. It may be that one contract is more suitable to be paid through the company, but the next falls within IR35 and therefore it’d be preferable to be paid through the Umbrella company.

Compare your take home pay through Umbrella or Limited

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If you would like to discuss how our Umbrella service can help you, please do not hesitate to contact a member of our team on 01206 591 000 or email us at info@contractorumbrella.com.

We have over 20 years experience, have won numerous awards and have helped tens of thousands of contractors. Our friendly, professional contract managers are experts in their field, so no matter the question, we’re sure we can help you.

Signing up couldn’t be easier – just click ‘sign up‘, provide us with some basic details and within 24 hours your online employment file will be activated. We’ll also send you a comprehensive and straightforward employee starter pack and you will be contacted by your personal Contract Manager.