Umbrella Company vs Limited Company

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Should contractors operate through an umbrella company or limited company? This is a question that every contractor faces, whether when just starting out or further down the road. So which is the best option? And what’s the difference between an umbrella company and a limited company? Is one better than the other? Or does it depend on the nature of your contract and priorities? This guide will break everything down to help you make an informed choice about umbrella vs limited.

What is an umbrella company?

An umbrella company sits between a contractor and an end client or recruiter. They employ contractors on temporary assignments, invoicing the client for the work on the contractor’s behalf. As employers, umbrellas also take care of statutory payroll requirements, meaning they deduct PAYE costs, like Income Tax and National Insurance Contributions (NICs) before paying the contractor. Umbrella working offers contractors the best of both worlds – the freedom of choosing your assignments and the security and convenience of being employed. Along with this, you’ll also benefit from:

Your tax, managed

As briefly touched on above, all your tax obligations, relating to your employment with them, are managed by the umbrella company, leaving you to focus on the job at hand.

Trusted payroll

No more chasing late payments, an umbrella company pays you quickly, accurately and on time – whether weekly or monthly.

Employment rights

As employees – albeit temporary ones – umbrella workers receive statutory employment rights, such as paid sick leave, maternity and paternity and holiday pay.

No more IR35

A critical difference between umbrella and limited company working is that umbrella workers don’t need to worry about IR35. This complex legislation isn’t a consideration for employees but is something that limited company contractors need to be aware of.

For an in-depth view of working this way, please check out our guide to umbrella companies.

What is a limited company?

Limited companies are incorporated businesses, meaning they are registered with Companies House and therefore a legally separate entity from their owners. Many contractors opt to work via a limited company, through which they provide their services to clients. At a glance, here are some reasons why:

Limited liability

The owner’s liability is limited to the value of their shares, meaning that your personal assets are not at risk, if you run into financial difficulties.

Tax planning

Limited company owners enjoy tax planning opportunities, with directors able to extract profits from their business efficiently and in a more flexible manner.

Growth and succession

Whether it’s hiring employees or bringing onboard new shareholders to take the reins in time, limited companies offer a stable foundation for succession planning and potentially even a future sale.

Credibility

In contrast to working as a sole trader, limited companies carry a certain amount of credibility, so offering clients peace of mind, thanks to the requirement for them to be registered with more statutory bodies, such as HMRC and Companies House.