Limited vs Umbrella
To work as a contractor, freelancer or consultant the most popular choices are either through your own limited company or as an employee through an umbrella company. Both the options have their own advantages and disadvantages. To get you started let’s first understand what each of them means.
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 expense 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.
This solution is ideal for contractors and freelancers who are starting out or planning to work on shorter assignments. It involves less paperwork as the umbrella company takes care of the administration hassle as you are employed by them.
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, setup 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 the relevant tax and business document to 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.
The below table summarises some of the important advantages and disadvantages associated with each solution, for more information please speak to us on 0330 088 6686
| ADVANTAGES | |
|---|---|
| UMBRELLA COMPANY | LIMITED COMPANY |
| 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. | This is the most tax efficient way of contracting. The take home is typically higher with a limited company as compared to an umbrella. |
| Ideal for short term or temporary contractors. | You retain complete control over the business financials and there is no reliance on third parties to get paid. |
| The umbrella deducts all tax and NI before they pay you a salary. So, there will be no further deductions from your salary. | Access to flat rate scheme, ability to claim wider range of expenses and greater opportunities for tax planning. |
| Quick and easy to setup, involves less paperwork and good for contractors who are just starting out. | This is more professional and helps you build a status as some clients prefer to work with only limited companies. |
| DISADVANTAGES | |
| 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. | There is less privacy as most of the information is publicly available on the Companies house like director details and accounts. |
| 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. | You, as a director, are responsible for filing annual returns and accounts, submitting expenses and invoices; meaning higher administrative responsibilities. |
| Limited company gives you a professional status and an ability to create your own contracting brand. | As there are increased statutory responsibilities the accountancy fee maybe higher and the penalties for not complying with the obligations can be high. |
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