We take the time here to look at umbrella company vs limited company. This is a valid consideration as the take-home pay will differ substantially. The decision to go through an umbrella or limited company will become easier to make to a greater extent the more that you earn. Several differences exist between providing your services through a limited company or umbrella company. When it comes to limited vs umbrella, besides earning more through a limited company, extra responsibilities also come with this too. The main difference between umbrella and limited company is that the limited company take-home pay will be greater.
When we look at the choice between limited or umbrella company, an important point to note is IR35. This is probably the main difference between umbrella company and limited company option, when it comes to making a decision on which way to provide your services. The IR35 rules shift the responsibility of determining whether IR35 applies to the service provider rather than the contractor. This became effective in the private sector in April 2021 and the public sector in April 2017. The changes apply to large and medium companies. However, small companies are not affected. As a result of the change in 2021, many contractors moved to work through umbrella companies. Now that time has moved forward somewhat, recruitment companies have adapted, and the number of contracts out there is starting to pick up again.
Setting up for yourself
When you start up as a limited company contractor for the first time, you will need to decide how you would like to get paid. Therefore, there are two options for you to choose from, and these are:
- Setting up a limited company of your own. It will need its own bank account and you will also need to appoint an accountant to look after both the company and your personal tax affairs.
- Work under an umbrella company. You will not need a separate bank account and as you will be paying tax at source on your income you may not need an accountant either.
Both options are well established and have been there for contractors for many years. What’s more, each one has its pros and cons.
If you are going to be moving from an umbrella company to your own company, there are specific steps to follow.
Furthermore, if you are setting up your own business, we have set out the differences between contracting and freelancing.
Umbrella company vs limited company -IR35 factors
What is the difference between an umbrella company and a limited company? When we think about this, the IR35 rules are a key consideration when it comes to limited company vs umbrella company.
To explain here, IR35 are a set of tax rules that initially came into force in 2000. As a contractor, you can be inside or outside of these rules, depending on your circumstances. Therefore, you know your IR35 status before you decide whether to move to work through umbrella or limited company.
A reform in the rules came into force in the public sector on 6 April 2017, and more recently, on 6 April 2021, the same reform came into force for the private sector. The reform was that the responsibility of determining the IR35 status moved from the contractor to the relevant body that provides the work, such as a recruitment agency or end client.
If you are inside IR35, the rules will treat you as a disguised employee. As a result, you will pay tax and National Insurance (NI) just like an employee does. Your client will deduct these taxes from your contractor’s pay as part of your work.
When you are working through and running your own company, you will have specific duties, including filing deadlines to meet. What’s more, you will also need to pay for accountancy services. Therefore, if the IR35 rules catch the only work you can obtain, you will probably be better off working via an umbrella company.
Umbrella vs limited company -further IR35 factors
When we consider umbrella vs limited company, if you are clear that you are outside the IR35 rules, operating as a limited company director is the best option. Of course when we consider limited company vs umbrella company, this also depends on your contract rate. If you earn at least £200 per day, you will be better off working through your own company. Above all, the higher your contract rate is and assuming that IR35 does not catch you, the more attractive it is to work through your own limited company.
Both accountants and umbrella companies charge for their services. A typical accountant will charge between £70 and £120 + VAT per month. In comparison, umbrella companies’ charges can vary, depending on what service they offer you. If they are to process your expenses, their fees will be higher. However, for a basic service, the cost will be around £40 – £50 per month.
IR35 will play an important part in your decision when it comes to whether you work through an umbrella company or limited company. This is something you should consider from the outset, and it may be worth getting your contract checked out by a professional firm like Qdos before you make your final decision.
In addition, you may be offered a contract and you have an option of inside IR35 umbrella or limited company for the work. In this case, please check with your accountant which is the best option to take, in terms of umbrella company v limited company.
Limited company or umbrella -the fundamental differences between the two options
When we compare umbrella company vs limited company, if you are running your own company, you will be in control of your financial affairs. In addition, you will have company director duties in complying with current filing requirements with the authorities and government. You will also need to comply with any existing laws that apply. Furthermore, you will also need to ensure that you pay the correct business tax liabilities by each due date.
Whether working through your own company or an umbrella company, you will source your work through a recruitment agency.
To sum up, if you are working via an umbrella company, you will have fewer duties. On an ongoing basis, you will send in a timesheet each week or each month, and the umbrella company will invoice the client. The umbrella company will take care of all processing and administration work and pay you weekly or monthly.
Contracting limited company vs umbrella company -own company option
When we compare ltd company vs umbrella, let us now look at the pros and cons of ltd or umbrella.
Advantages -limited vs umbrella
The main advantages of limited company vs umbrella company, from a UK contractor limited company standpoint are:
- You will have complete control of your company’s affairs and finances.
- Having your own company looks better and more official in the eyes of certain recruiters and clients. These recruiters are in high-tech or very specialist industries and will only tend to give a contractor with their own company work in the field they provide contracts in.
- Assuming that you work efficiently, your salary, dividends, and expenses can be reimbursed quicker.
- You can reduce your tax exposure with the help of a specialist contractor accountant. This will result from claiming all genuine business expenses and tax planning for you and your company. You will earn a higher net take-home pay. This is because you control how your company pays you in terms of salary and dividends.
- When you have a limited company, this signifies that the director has limited liability. This means that the director’s personal assets are safe should the company get into trouble paying its bills.
Disadvantages -limited vs umbrella
The main disadvantages of limited company vs umbrella company, from a UK contractor limited company standpoint are:
- You will spend time dealing with company administration and paperwork.
- Keeping accounting records and maintaining day-to-day bookkeeping will take you extra time.
- You are responsible for your business affairs and meeting the HMRC and Companies House due dates each year. This comes in terms of filing a tax return for both your company and you personally and accounts for business.
You can pass much of the above over to your accountant. However, the director is the one who is ultimately responsible for meeting the company’s duties in terms of official reporting, etc.
Umbrella v limited company -umbrella company option
When we compare umbrella vs limited, let us now look at the pros and cons of umbrella or ltd.
Advantages -umbrella vs ltd
The main advantages of umbrella vs limited company, from an umbrella company standpoint are:
- When we compare umbrella company vs limited company, you will spend less time on administration-type tasks compared to a contractor with their own company.
- There are fewer duties for you in terms of filing requirements than a contractor with their own company. You will not need to file company accounts or be paying Corporation Tax, nor are you likely to be required to complete a personal tax return. Once you are up and running, sending a weekly or monthly timesheet will probably be your only requirement. The umbrella company will do the rest.
- When you work through an umbrella company, you may be entitled to holiday pay and sick pay. Your employer may also pay pension contributions on your behalf, which will be a further benefit.
- For short-term contracts, it would be better for you to operate via an umbrella company. When you do this, it will save the costs and the administration required in setting up and running a company.
Disadvantages -umbrella vs ltd
The main disadvantages of umbrella vs limited company, from an umbrella company standpoint are:
- When comparing umbrella company vs limited company one of the main disadvantages is you are not in control of your finances and affairs.
- You will not be tax efficient like a contractor with their own company would be. You will receive a salary for your work subject to PAYE income tax and NI.
- Through your work, you will not benefit from the professional image that a contractor with their own company will have. Therefore, you may be unable to obtain contracts for work in specific business sectors.
- There could be delays in payments of your pay. It will depend on how efficient your umbrella company is.
When you obtain a contract and compare umbrella company vs limited company, you must make your choice. However, there is no right or wrong choice, and it will all depend on your individual circumstances.
In terms of umbrella or limited company, your best option will be to contract through an umbrella option if:
- The majority of your work will be mainly inside IR35.
- You will be contracting short-term.
On the other hand, when comparing umbrella company vs limited company, the best option for you will be to operate through your own company if:
- The majority of your work will be outside IR35, and you plan to contract full-time for the foreseeable future.
- You are working in an industry where clients will only use contractors with their own companies.
- The higher your daily contract rate is, the more sense it makes to operate through a company you control.
Link to Contractor Advice UK group on