Limited Vs Umbrella

Limited Vs Umbrella

To work as a contractor, freelance or consultant the most popular choices are either through your own limited company or as an employee through an umbrella company. Both options have their own advantages and disadvantages.

Umbrella Company

Under the umbrella solution you become an employee of the umbrella company and are paid through PAYE. You are required to submit timesheets and expenses details on a weekly or monthly basis to the umbrella company. The umbrella company will then invoice the end client or the agency and pay you a salary after deducting income tax, national insurance and their margin for the services.

Using an umbrella company is simple, risk-free alternative to setting up and managing you own limited company.

Umbrella company acts as an employer for contractors and freelances who work on fixed term assignments.

The umbrella company engages contractors by way of contract employment, offering full employment rights. It then contracts out the service of the contractor to the agency or end client.

The contractor always remains as employee of the umbrella company for the series of assignments they undertake. Hence there is no administration or paperwork required as everything is dealt with by the umbrella company.

This structure is suitable for contractors who are just staring out, expected to contract for a short duration.

Limited Company

A limited company is your own personal service company that you can incorporate to run your business. To incorporate you need to register the company with Companies House, register for various taxes with HMRC, set up a business bank account and organise insurance cover.

The limited company has statutory and financial obligations and is a separate legal entity from you. As a limited company director, you will be responsible for submitting all relevant tax and business documents to the HMRC and Companies House.

Limited company requires added commitment because of the statutory responsibilities and is suitable for contractors and freelancers who have a contract for more than 6 months and earning at least £15 per hour.

LIMITED COMPANY
UMBRELLA COMPANY
ADVANTAGES

This is the most tax efficient way of contracting. The take home is typically higher with a limited company as compared to an umbrella.

It's the easiest solution as the umbrella company bears the administration hassle and pays you a salary. Moreover, insurance is provided by the umbrella.

You retain complete control over the business financials and there is no reliance on third parties to get paid.

Ideal for short term or temporary contractors.

Access to flat rate scheme, ability to claim wider range of expenses and greate opportunities for tax planning.

The umbrella deducts all tax and NI before they pay you a salary. So, there will be no further deductions from your salary.

This is more professional and helps you build a status as some clients prefer with only limited companies.

Quick and easy to setup, involves less paperwork and good for contractors who are just starting out.

DISADVANTAGES

There is less privacy as most of the information is publicly available on the Companies house like director details and accounts.

Dependency on the umbrella company is huge as they are responsible for collecting money you earn and then pay them to you. There is no control at your end.

You, as a director, are responsible for filing annual returns and accounts, submitting expenses and invoices; meaning higher administrative responsibilities.

It is the most expensive way to operate as your entire income is subject to Tax and NI like a permanent employee and the umbrella company charges a margin on top of it for processing payroll.

As there are increased statutory responsibilities the accountacny fee maybe higher and the penalties for not complying with the obligations can be high

Limited company gives you a professional status and an ability to create your own contracting brand.