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?

In this guide, we’ll break everything down to help you make an informed choice about umbrella vs limited.

What is an umbrella company?

An umbrella company is the intermediary 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 own 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.
Business expenses

Depending on the nature of your assignment – by this we mean whether it’s subject to supervision, direction or control (SDC) – umbrella company contractors can claim a range of business costs and expenses, just like a self-employed worker.

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 key 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 assetsare 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...

Umbrella company vs limited company

With a firm idea of the difference between ‘umbrella’ and ‘limited’, let’s measure some of these contrasting characteristics against one another.

Umbrella company Limited company
Tax obligations Takes care of your personal tax obligations related to your employment. Directors are responsible for calculating and paying over their own tax (when working outside IR35), along with that of their limited company.
IR35 Doesn’t come into the equation, given umbrella workers are employees. Your compliance is something to consider, given IR35’s tax implications.
Employment benefits Receive access to all statutory employment benefits. As owners and directors, limited company contractors do not automatically receive employment rights.
Invoicing Submit a timesheet and the umbrella company will take care of the rest. It’s up to you to invoice clients and chase late payments.
Responsibilities As employees, umbrella workers do not have any obligation other than to perform the services agreed in the contract. This includes keeping Companies House informed about director details and changes to company information, as well as other statutory filing requirements.
PAYE Are paid minus Income Tax and National Insurance Contributions (NICs), just like an employee. When working outside IR35, are not taxed PAYE and therefore can enjoy greater take-home pay.

Umbrella or limited company: which is best?

In truth, one isn’t better than the other – it may just come down to personal preference, or whether the end hirer or agency insists you use an umbrella company.

For example, given that working through an umbrella company is quick, simple and convenient, many people new to contracting use it to try out self-employment. Recent changes to IR35 have also made umbrella working a more compelling prospect. On the flip side, the potential to take home more money after tax can be the deciding factor for limited company contractors.

With you all the way

To learn more about working through an umbrella or limited company, please request a callback and we’ll be in touch.