Umbrella company vs limited company

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We take the time here to look at a UK umbrella company vs limited company. The comparison between limited company vs umbrella is a valid one as the take-home pay differs substantially between these two methods of UK contracting. 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, you earn more through your own limited company. However, when we compare umbrella vs limited company, extra responsibilities come with running your own company too. Therefore, the main difference between umbrella and limited company is that the limited company take-home pay will be greater than umbrella take-home pay. However, in today’s UK contracting world, is contracting worth it (UK)?

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 you’re deciding 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 public sector in April 2017 and in the private sector in April 2021. At the moment, 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, now that time has moved forward somewhat, many recruitment companies have adapted. Therefore, the number of contracts out there is starting to pick up again.

Initial thoughts 

First thoughts

When starting up as a contractor for the first time, you need to decide how you’d like to get paid. Therefore, there’s two options for you to choose from, and these are:

  • Set up a limited company of your own as a limited company contractor. Basically, the company must have its own bank account from the outset. In addition, you should appoint an accountant to look after both the company and your personal tax affairs.
  • Work via an umbrella arrangement. When considering what is an umbrella contract, you’ll be contracting through an umbrella company. Basically, when considering what is an umbrella company for contractors, you’ll not need a separate bank account. What’s more, as you’ll be paying tax at source on your income, you may not need an accountant either. If you work in the IT industry, you’ll need an IT contractor umbrella company to carry out your work. Therefore, the next step is to find the best umbrella company for IT contractors.

These two business structures are quite different in terms of responsibilities and how you receive your income. With your own company, you can pay yourself tax-efficiently however you’ve extra responsibilities. Alternatively, with the umbrella option you’ll be paid like an employee and have fewer formal responsibilities.

Further initial umbrella company thoughts

When you have an umbrella arrangement, you could do an umbrella company comparison (UK) to see what comes up. What’s more, when you perform a contractor umbrella companies’ comparison, you can also 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. All of these are good initial ideas, if you intend to work 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 one has its own pros and cons.

Before you start working through an umbrella company, you should compare umbrella companies (UK) as we mention above. You can use a comparison site to check umbrella company rates, in terms of contract work. You can also use these sites to check the umbrella company fees. What’s more, besides umbrella rates, you can check other factors such as expenses policies and any other benefits they may offer. What’s more, before you take up an umbrella contract, it’s wise to check the contracting umbrella company take-home pay and other benefits for each role.

If you’re going to be moving from umbrella into contracting, there’s certain steps follow. Our guide, which covers moving from umbrella company into contracting through your own company, explains the specific steps to follow in this regard.

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

Common questions 

UK contractors who work in IT and other industries, will have several questions on ltd vs umbrella company. When it comes to umbrella company or ltd, working through your own company is much safer, 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 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 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?

In this guide, we’ll look into the above. We’ll also compare the key differences between UK umbrella company and your own company.

UK umbrella company vs limited company 

The IR35 factors and thoughts around this 

What is the difference between an umbrella company and a limited company? When we think about this, the IR35 rules are a key factor in terms of limited company vs umbrella company.

To explain here, IR35 are a set of tax rules that initially came into force in the year 2000. As a UK contractor, you can be inside or outside of these rules, depending on your circumstances. Therefore, you’ll need to 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. Then, more recently on 6 April 2021, the same reform came into force for the private sector. The reforms were that the responsibility of determining the IR35 status moved from the contractor to the relevant body that provides the work. This relevant body is 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.

When you’re working through and run a limited company, you’ll have specific duties. These include certain filing deadlines that you need to meet. What’s more, you’ll also need to pay for accountancy services. Therefore, if the IR35 rules catch the only work you can obtain, you’ll probably be better off working via 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 we consider umbrella vs limited company, if you are clear that you’re outside the IR35 rules, operating as a limited company director is the best option. Of course, when we consider limited company vs umbrella company (UK), this also depends on your contract rate. If you earn at least £200 per day, you’ll be better off working through your own UK company. Above all, the higher your contract rate is and assuming that IR35 doesn’t 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 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? Basically, when we compare this to UK contracting and using an accountant, a contract umbrella company charges can vary. Indeed, this’ll depend on what service they offer you. If the contractor umbrella (UK) company are to process your expenses, their umbrella company fees will be higher. However, for basic umbrella company costs, the monthly fee will be around £40-£50. 

Further thoughts on initial contract work 

IR35 will play a key part in your decision when it comes to whether you work through an umbrella company or limited company. You may have heard the term IR35 short term contracts and this refers to a short period of work under the IR35 rules. Therefore, it’s important to highlight that there’s several factors which 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.

It could also be the case that 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 whether it’s best to use your own company or switch to an inside ir35 umbrella company contract.

The fundamental differences between the limited company or umbrella option 

When we compare umbrella company vs limited company, if you’re running your own UK contracting company, you’ll be in control of your financial affairs. In addition, you’ll have company director duties in complying with current filing requirements with the authorities and government. You’ll also need to comply with any existing laws that apply. Furthermore, you’ll 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’ll source your work through a recruitment agency.

To sum up, when contracting via umbrella company, you’ll have fewer duties. On an ongoing basis, you will send in a timesheet each week or each month, and the contractor’s 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 (UK) -own company option 

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

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’ll spend less time on administration-type tasks compared to a contractor with their own company.
  • When you’re working through an umbrella company contract arrangement, there’s fewer duties in terms of umbrella company requirements than a contractor with their own company. As an umbrella company contractor, you’ll 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’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 do the rest.
  • When you’re working through an umbrella company for contractors (UK), you may be entitled to holiday pay and sick pay. Your employer may also pay pension contributions on your behalf, which’ll be a further benefit.
  • For short-term contracts, it’d be better for you to operate via an umbrella company. When you’re umbrella contracting, it’ll 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 as an umbrella contractor is you aren’t in control of your finances and affairs.
  • Umbrella company contractors aren’t tax-efficient like a contractor 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 that a contractor with their own company will have. Therefore, you may be unable to obtain contracts for work in specific business sectors.
  • When you’re an umbrella company UK contractor there could be delays in payments of your pay. It’ll depend on how efficient your umbrella company is.
  • As a worker via an umbrella company, 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 is an umbrella company for a contractor and looked at the pros and cons associated with this. In addition, we’ve looked at the option of contracting for yourself through your own limited company and considered the pros and cons of this option too. 

When you obtain a contract and compare umbrella company vs limited company, you must make your choice. However, there’s no right or wrong choice, and it’ll all depend on your individual circumstances. If you’ve been working under an umbrella arrangement and now have the option of moving 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 umbrella company route if:

  • The majority of your work will be mainly inside IR35.
  • You will be contracting short-term.

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

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

  • The majority of your work will be 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


Published On: January 4th, 2024 / Categories: Moving Into Contracting /

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