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. This becomes apparent to a greater extent, the more that you actually earn.
There are several differences between providing your services through a limited company and umbrella company. Besides earning more through a limited company, there are also extra responsibilities that come with this.
Setting up for yourself
When you decide to start up as a limited company contractor for the first time, you will need to decide on a way that you would like to get paid. Therefore, there are two options for you to choose from, and these are:
- Work under an umbrella company.
Both of these options are well established and they 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 certain steps to follow.
Furthermore, if you are going to be setting up your own business, we have summarised the differences between contracting or freelancing.
Umbrella company vs limited company -IR35 factors
When we look at umbrella company vs limited company, the IR35 rules are a key consideration.
To explain here, IR35 are a set of tax rules that came into force in the year 2000. As a contractor, you can be inside or outside of these rules, and this depends on your circumstances. Therefore, it is important that you know your IR35 status before you decide whether to move to contracting through your own 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 itself 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 being a disguised employee. As a result, you will pay tax and National Insurance (NI) just like an employee does. As part of your work, your client will deduct these taxes from your contractor’s pay.
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 will catch the only work that you can obtain, you will probably be better off working via an umbrella company instead.
Further IR35 factors
If it is clear that you are outside the IR35 rules, operating as a limited company director is the best option. Of course, this also depends on your contract rate. If you are earning at least £200 per day, it follows that 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, and this depends on what service they are offering 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.
Limited company or umbrella -the basic differences between the two options
If you are running your own company, you will be in control of your financial affairs.
What’s more, you will have company director duties in terms of having to comply with current filing requirements with the authorities and government. You will also need to comply with any current laws that apply.
Furthermore, you will also need to ensure that you pay the correct business tax liabilities by each of their due dates.
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 each week or each month.
Limited company vs umbrella company -own company option
- You will have full control of your company’s affairs and its 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 they will only tend to give a contractor with their own company work in the field that they provide contracts in.
- Assuming that you work efficiently, your salary and dividends and expenses can be reimbursed to you quicker.
- You can reduce your tax exposure. This will be as a result of claiming for 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 are in control of how your company pays you in terms of salary and dividends
- 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 various deadlines with HMRC and Companies House due dates each year.
You can pass much of the above over to your accountant. However, the director is the one who is ultimately responsible for meeting their company’s duties in terms of official reporting, etc.
Umbrella company vs limited company -umbrella company option
- 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, compared to 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 the only requirement of you. 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 a and running a company.
- 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. Your pay will be in the form of salary, and this is subject to both PAYE income tax and NI.
- Through your work, you will not have the benefit of a 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 you umbrella company is.
When you obtain a contract and are comparing umbrella company vs limited company, you will need to make your choice. However, there is no right or wrong choice and it will all depend on your individual circumstances.
Your best option will be to contract through an umbrella company if:
- the majority of your work will be mainly inside IR35; or
- you will be contracting short term
On the other hand, 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 go contracting full time for the foreseeable future; or
- you are working in an industry where clients will only use contractors with their own companies; or
- the higher your daily contract rate is the more sense it makes to operate through a company that is controlled by you
Link to Contractor Advice UK group on