Umbrella company vs limited company

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Introduction 

We take the time here to look at a UK umbrella company vs a limited company. The comparison between limited company vs umbrella is valid as the take-home pay differs substantially between these two methods of UK contracting. The decision to go through an umbrella or limited company becomes easier to make to a greater extent as you earn more. Several differences exist between providing your services through a limited or umbrella company. Regarding limited vs umbrella, you’ll earn more through your limited company. However, when we compare an umbrella vs a limited company, extra responsibilities come with running your own company. Therefore, the main difference between an umbrella and a limited company is that the limited company take-home pay is greater than the umbrella take-home pay. However, in today’s UK contracting world, is contracting worth it (UK)?

When we look at the choice between a limited or umbrella company, an important point to note is IR35. This is the main difference between an umbrella company and a limited company option when deciding how 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 public sector in April 2017 and in the private sector in April 2021. Now, the changes only apply to large and medium companies. Therefore, small companies aren’t affected. As a result of the change in 2021, many limited company contractors moved to work through contracting umbrella companies. However, many recruitment companies have adapted now that time has moved forward. Therefore, the number of contracts is starting to pick up again.

Initial thoughts 

First thoughts

When starting as a contractor for the first time, you must decide how to get paid. Therefore, there are two options for you to choose from, and these are:

  • Set up your own company as a new limited company contractor. The company must have its own bank account from the outset. In addition, you should appoint an accountant to look after the company and your personal tax affairs.
  • Work via an umbrella arrangement. When we consider what is an umbrella contract, you’ll be contracting through an umbrella company. When considering what an umbrella company is for contractors, you won’t require a separate bank account. Moreover, you may not need an accountant as you’ll be paying tax at source on your income. If you work in the IT industry, you can look for an IT contractor umbrella company through which to perform your work. Therefore, the next step is to find the best umbrella company for IT contractors.

The two business structures differ regarding responsibilities and how you receive income. With your own company, you can pay yourself tax-efficiently; however, you’ll have extra responsibilities. Alternatively, with the umbrella option, you’ll be paid like an employee and have fewer formal responsibilities.

Further thoughts on the umbrella company option

When you have an umbrella arrangement, you could do an umbrella company comparison (UK) to see what comes up. What’s more, when you compare a contractor umbrella company, you can search for the best contractor umbrella company. Indeed, when you compare umbrella companies for contractors (UK), you can check the umbrella company comparison site to see how they rank. As part of this, you can do an umbrella company fees comparison and look at other factors as part of your umbrella comparison. These are good initial ideas for working through an umbrella company.

More initial thoughts

The two options of contract work (limited company) and contract work (umbrella company) are well established. Indeed, they’ve been around for UK contractors for many years. However, when we consider umbrella company vs limited company, each has pros and cons.

Before working through an umbrella company, you should compare umbrella companies (UK) as mentioned above. Moreover, you can use a comparison site to check umbrella company rates regarding contract work. Indeed, you can use these sites to check the umbrella company fees. Besides umbrella rates, you can check other factors, such as expense policies and any other benefits they offer. Therefore, before you take up an umbrella contract, it’s wise to check the contracting umbrella company’s take-home pay and other benefits for each role.

If you’re moving from umbrella to contracting, there are certain steps to follow. Our guide, which covers moving from an umbrella company into contracting through your own company, explains these steps.

Furthermore, if you’re now setting up your own business, we’ve identified the differences between contracting and freelancing.

Common questions 

UK contractors in IT and other industries have several questions about Ltd vs umbrella companies. Working through your own company is much safer when choosing between an umbrella company or Ltd. However, it’s not always viable. Indeed, many common questions will cover how umbrella companies work. Therefore, some examples of common questions will include:

  • What is an umbrella company (UK)?
  • Are umbrella companies worth it?
  • How to choose an umbrella company?
  • Are umbrella companies safe?
  • Do I need an umbrella company?
  • Do I have to be paid through an umbrella company?
  • How much does an umbrella company charge?
  • Is an umbrella company better than PAYE?
  • Which umbrella company is best?
  • Can an umbrella company pay a limited company?
  • Does IR35 apply to an umbrella company?
  • How do I set up my own company?
  • How to work through your own UK company?

This guide will research the above and compare the key differences between a UK umbrella company and your own company.

UK umbrella company vs limited company 

What are the IR35 factors & thoughts around this? 

What is the difference between an umbrella company and a limited company? The IR35 rules are fundamental when deciding between a limited company vs an umbrella company.

To explain, IR35 is a set of tax rules that came into force in 2000. As a UK contractor, you can be inside or outside these rules, depending on your circumstances. Therefore, you must determine your IR35 status before you decide whether to move to work through an umbrella or limited company.

A reform in the rules came into force in the public sector on 6 April 2017. More recently, on 6 April 2021, the same reform was enacted for the private sector. The reforms resulted in the responsibility for determining the IR35 status moving from the contractor to the relevant body that provides the work, usually the recruitment agency or end client.

If you’re inside IR35, the rules treat you as a disguised employee. As a result, you’ll pay tax and National Insurance contributions (NI) just like an employee does. Your client will deduct these taxes from your contractor’s pay as part of your work.

You’ll have specific duties when working through and running a limited company. These include particular tax filing deadlines which you must meet. Moreover, you’ll likely require accountancy services and incur a cost. Therefore, if the IR35 rules catch the only work you can obtain, you’ll probably be better off working via a UK contractor umbrella company. As a result, you should take the time to look for the best umbrella company for contractors (UK).

Further IR35 factors for umbrella vs limited company

When considering umbrella vs limited company, if you are clear you’re outside the IR35 rules, operating as a limited company director is the best option. Of course, considering a limited company vs an umbrella company (UK) depends on your contract rate. If you earn at least £200 daily, you’ll be better off working through your UK company. Above all, the higher your contract rate and assuming IR35 doesn’t catch you, the more attractive it is to work through a limited company.

Both accountants and umbrella companies charge for their services. A typical accountant can charge between £70 and £120 + VAT per month. However, how does an umbrella company work for contractors? What’s more, how much do umbrella companies charge for their services? When we compare this to UK contracting and using an accountant, a contract umbrella company charges can vary. Indeed, this will depend on what service they offer you. If the contractor umbrella (UK) company are to process your expenses, their umbrella company fees are higher. However, the monthly payment is usually around £40-£50 for basic umbrella company costs. 

More thoughts on initial contract work 

IR35 will play a key part in deciding whether to work through an umbrella or a limited company. You may have heard the term IR35 short-term contracts, which refers to a temporary work period under the IR35 rules. Therefore, it’s important to highlight several factors are considered as part of an IR35 decision. Indeed, your contract could be for one week or two years. This alone will not influence the decision on whether it falls under IR35 or not. Therefore, the IR35 status of your work is something you should consider from the outset. As a result, it may be worth getting your contract checked out by a professional firm like Qdos. Once you’ve done this, you can make your final decision.

You may be offered a contract and can use an inside IR35 umbrella or a limited company. Please check with your accountant whether using your own company or switching to an inside IR35 umbrella company contract is best.

What are the main differences between a limited company or umbrella option? 

When we compare an umbrella company vs a limited company, you’ll be in control of your financial affairs if you run your own UK contracting company. In addition, you’ll have company director duties regarding current filing requirements with the authorities and government. Therefore, you must comply with any existing laws that apply. Furthermore, you must pay the correct business tax liabilities by each due date.

Whether working through your own or an umbrella company, you’ll source your work through a recruitment agency.

In summary, you’ll have fewer duties when contracting via an umbrella company. On an ongoing basis, you’ll send in a timesheet each week or each month, and the contractor’s umbrella company will invoice the client. The umbrella company will handle all processing and administration work and pay you weekly or monthly. 

Contracting limited company vs umbrella company (UK) & the own company option 

Let’s compare a limited company to an umbrella and consider the pros and cons of the limited company option. 

Advantages for limited vs umbrella 

The main advantages of a limited company vs an umbrella company, from a UK contractor limited company standpoint, are: 

  • You’ll 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 only tend to give a contractor with their company the work for which they provide contracts.
  • If you work efficiently, your salary, dividends, and expenses can be reimbursed quickly.
  • With the help of a specialist contractor accountant, you can reduce your tax exposure. This will result from claiming all genuine business expenses and reviewing tax planning opportunities for you and your company. You’ll earn a higher net take-home pay because you control how your company pays you regarding salary and dividends.
  • When you have a limited company, this signifies that the director has limited liability. This means the director’s assets are safe should the company get into trouble paying its bills.

Disadvantages for limited vs umbrella 

The main disadvantages of limited company vs umbrella company, from a UK contractor limited company standpoint, are: 

  • You’ll spend time dealing with company administration and paperwork.
  • Keeping accounting records and maintaining day-to-day bookkeeping will take you extra time.
  • You’re responsible for your business affairs and meeting the HMRC and Companies House due dates. This involves filing a tax return, accounts for your company, and a tax return for you personally.

You can pass much of the above over to your accountant. However, the director is ultimately responsible for meeting the company’s duties in terms of official reporting, etc.

Umbrella v limited company & the umbrella company option 

When we compare umbrella vs limited, let’s look at the pros and cons of umbrella or ltd. Therefore, let’s consider the benefits and disadvantages of an umbrella company. 

Advantages for umbrella vs ltd 

The main advantages of an umbrella vs limited company, from an umbrella company standpoint, are: 

  • When we compare an umbrella company vs a limited company, you’ll spend less time on administration-type tasks than a contractor with their own company.
  • When working through an umbrella company contract arrangement, there are fewer duties regarding umbrella company requirements than those for contractors with their own company. As an umbrella company contractor, you won’t have to file company accounts or pay Corporation Tax, nor will you likely to file a personal tax return. Once you’re up and running with your umbrella for contractors, sending a weekly or monthly timesheet will probably be your only requirement. The contractor umbrella company will likely do the rest.
  • When working through an umbrella company for contractors (UK), you may be entitled to holiday and sick pay. Your employer may also pay pension contributions on your behalf, which will be a further benefit.
  • For short-term contracts, it’d be better to operate via an umbrella company. Umbrella contracting will save the costs and administration required to set up and run a company.

Disadvantages for umbrella vs ltd 

The main disadvantages of an umbrella vs a limited company, from an umbrella company standpoint, are: 

  • When comparing an umbrella company vs a limited company, one of the main disadvantages of an umbrella contractor is that you’re not in control of your finances and affairs.
  • Umbrella company contractors aren’t tax-efficient like contractors with their own company would be. You’ll receive a salary for your work subject to PAYE income tax and NI.
  • Through your work as an umbrella company contractor (UK), you’ll not benefit from the professional image a contractor with their own company has. Therefore, you may be unable to obtain contracts for work in specific business sectors.
  • As an umbrella company UK contractor, there could be delays in your payments. It’ll depend on how efficient your umbrella company is.
  • As a worker via an umbrella, you’ll be subject to their umbrella company expenses rules. These may limit what you can claim for, whereas, through your own company, you can claim for all genuine business expenses.

Final thoughts 

In this guide on umbrella company v limited company, we’ve considered what an umbrella company is for a contractor and its pros and cons. In addition, we’ve considered contracting for yourself through a limited company and the pros and cons of this option. 

When you obtain a contract and compare an umbrella company vs a limited company, you must make your choice. However, there’s no right or wrong choice, and it’ll all depend on your circumstances. If you’ve been working under an umbrella arrangement and now can move from umbrella to contracting on your own, please consider the above tips.

In summary, between umbrella or limited company, your best option is to go contracting under the umbrella company route if:

  • Most of your work is inside IR35.
  • You’ll be contracting short-term.

When you take the umbrella option, it’s key to research and find the best umbrella company (UK).

On the other hand, when comparing an umbrella company vs a limited company, the best option for you is to operate through your own UK contracting company if:

  • Most of your work is outside IR35, and you plan to contract full-time for the foreseeable future.
  • You’re working in an industry where clients 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

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2024 / Categories: Moving Into Contracting /

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