Limited Company or Umbrella Company?If you are deciding whether to use an umbrella company or go limited, the following pages may help:
- Limited Company and Umbrella Company Take Home Pay
- A Simple Guide to how Umbrella Companies Work
- Umbrella Company Expenses
- Specialist Sectors
The most common ways to operate as a contractor, freelancer, locum or consultant are through your own limited company or by employing the services of an umbrella company, each with their own respective advantages and disadvantages. To help you decide on the best way to operate for you we have put together our limited vs umbrella guide so you have all the information you need to make the right decision of if you should go limited or umbrella.
What is an umbrella company?
An umbrella company will act as your employer. If you choose to operate through an umbrella company then you are required to complete and submit time sheets and expense details to the umbrella company. They will then collect payment from your client and pay your salary onto you with income tax, national insurance and their fee deducted.
Advantages of contracting through an umbrella company
Easy to use
Umbrella companies are incredibly easy to use as they relieve you of the burden of handling your own company accounts and finances. The umbrella company will take care of all your bookkeeping on your behalf so once you receive your salary you know there will be no further deductions.
Ideal for temporary contractors
The simplicity of umbrella companies means that they provide a great temporary solution for those that are only planning on contracting for a short period of time (usually three months or less). They also provide an easy, low-risk option for those that are just trying out contracting and are not yet ready to commit to limited company ownership.
Disadvantages of contracting through an umbrella company
The major disadvantage of working through an umbrella company is that it is the most expensive way to operate. Your income will be subjected to full tax and national insurance just like you would be if you were a full time employee, plus the umbrella company will charge a fee for handling your finances.
Lack of control
Through using an umbrella company you hand over your accounts and finances to them. The umbrella company is the one responsible for collecting your earnings from your client and then paying them on to you. This removes the element of freedom that you would experience if you were working through your own limited company.
Having limited in your company name provides an element of professionalism and status. Those who are working through an umbrella company and do not have limited status could be perceived as less established, experienced and competent when compared to a limited company contractor.
What is a limited company?
A limited company is an organisation that you can set up in order to run your business. Limited companies have their own legal identity so they can own assets in their own right and are responsible for their own income and outgoings, meaning that your company finances will be completely separate to yours. When a limited company makes a profit it is owned by the company. As the limited company director you will be an employee of your limited company, so your company can pay you a monthly salary.
Advantages of contracting through a limited company
Any accountant will tell you that working through a limited company is the most tax efficient way of contracting. As a general example you will take home between 75 and 80% of your contract as opposed to 60 to 65% of your contract if you were to operate through an umbrella company. Limited company contractors have greater opportunities for tax planning, are able to claim on a wider range of expenses and have access to the flat rate VAT scheme. To see how much you could be taking home as a limited company contractor, please use our contractor calculator.
Low financial risk
Limited companies have their own legal identity and so the company’s finances are completely separate to the finances of its shareholders. This means that if your limited company was to encounter any financial difficulties your personal assets would not be at risk, although shareholders are required to financially back the business up to a fixed amount.
As a limited company owner you are able to claim on a wide range of expenses. Expenses are costs that are incurred wholly and exclusively for the running of your business such as equipment or business travel. For more information on contractor expenses you may find our expenses page useful.
Limited company ownership means that you maintain complete control of your business financials and you will not have to deal with any third parties to get your income. Keeping control of your company and your accounts gives you the element of freedom that you may have expected when you first decided to start working for yourself.
Having ‘limited’ in your company name gives your business an air of respect and professionalism. This could give you the edge when landing new contracts and some companies may have a policy stating that they will only work with limited company contractors.
Disadvantages of contracting through a limited company
As a limited company director you are required to submit details to Companies House, which will become public record and can be viewed by anybody. These details include company accounts and information on your company shareholders.
Limited companies come with additional administration responsibilities including completion of annual returns. Limited company ownership also means that you must keep accounting records, which may include:
- Details of the company’s income and outgoings
- Information on any debts the company may have
- Assets owned by the business
- All goods that have been purchased and sold.
Increased accountancy fees
The increased administration responsibilities and more complex accounts that limited companies have mean that you may find yourself paying more money in accountancy fees than you were before. However, it is worth remembering that umbrella companies charge fees to take care of your bookkeeping and financials, which are often more than the increased accountancy charges. Limited companies also provide greater scope to work tax efficiently, which could potentially provide additional savings.
For more information and advice on choosing the right option for you please feel free to contact a member of our new business team on 01253 362062 or email: firstname.lastname@example.org who would be happy to answer any questions that you may have.
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