Umbrella Company vs Limited Company

As a contractor or freelancer, there are several things that you have to be aware of.
However, deciding how you’re actually going to be paid when you’re not directly employed by a company as a permanent member of staff is arguably the most important. 

But there’s no need to panic. There are two main ways that contractors and freelancers can invoice for their services, each with different benefits and drawbacks. These include:

Limited Company

Through a limited company – using this method, you establish a distinct legal entity which employs you as a director/shareholder and the company owns any profits or losses you make. The ‘limited’ in a limited company refers to limited liability, meaning that your personal assets are protected should the company suffer financial problems.

For more details about Brookson's Limited Company Service, click here.

Umbrella Solution

Through an umbrella company – here you sign a contract with a company who will act as an intermediary between you and the client, with the umbrella company paying you as an employee via PAYE. While you are not entitled to the preferential tax rate you receive for a limited company, you do get the standard PAYE employee benefits.

For more details about Brookson's Umbrella Solution, click here.

Umbrella Vs Limited

It’s safe to say that this is the area where contractors really can reap the rewards of working through a limited company of their own.

Umbrella companies take much of the effort out of working, but to do so they also take a cut of the payment generated by your services. In practice, this means that the average umbrella contractor can expect to take home somewhere between 67 and 76 percent of the value of their contract. In contrast, the tax efficiencies on offer when working as a limited company contractor means you can keep anything from 81 to 86 per cent.

Incorporating your limited company is a relatively simple process – you need to submit basic details to Companies House such as the company’s name, address, directors and ‘articles of association’, which are rules for how the company will be run. Model articles are available free to use from Companies House. Alternatively, you can use a company formation agent who will take care of much of the administration for you.

With an umbrella company, the process is even less complicated, because you simply become an employee of the provider. Beyond your contract of employment with the company, there will be very little else you need to do.

Joining an umbrella company puts you back into the pay as you earn (PAYE) system which is used by any employee. Some expenses can be claimed back against your tax liability, but ultimately this is as far as the benefits go.

There’s no doubt that operating as a limited company is the most tax efficient way of working open to you. As director and shareholder, you can claim back a much wider range of expenses. For example, legitimate expenses claims can cover accountancy fees, software and even equipment – provided it is solely used for work purposes. There is also the flat rate VAT system, which means you get to retain some of the VAT you receive.

There’s a common belief that running your own company is complex and time-consuming. But there may well be less to it than you might have expected – especially if you hire the services of a reputable accountant whose fees are tax deductible. Nevertheless, you do have sole responsibility for the administration of your business, which means that you will have to shoulder some bureaucracy. Still, don’t forget that there are plenty of service providers out there who can lighten some of the load and deal with some of your day-to-day tasks.

On the other hand, beyond the regular tasks of finding your assignments and reviewing your employment contract, joining an umbrella company will mean far less is expected of you.

On the other side of the coin, limited company contractors enjoy total control alongside their responsibilities. You’re in charge of your own tax and financial affairs, which means that you have plenty of scope to adapt and develop your business as your circumstances change. It also means you’re the first person to know if anything goes wrong and you can get it fixed.

Working as an umbrella contractor might mean less paperwork, but it also means that your livelihood is in someone else’s hands. They’re responsible for making sure you get paid and taxed correctly, as well as dealing with statutory payments like sick pay and maternity leave. You might find that you prefer having the final say in your financial affairs.

Yes – but it does depend on your situation, leaving a PAYE umbrella company is no different to leaving the employer you had when you decided to become a contractor – the umbrella company should issue you with a P45 and you can begin setting up your limited company. However, this is not always the case if you are mid-contract, where you will need the agreement of the recruitment agency to end their contract with the client. When considering the switch, IR35 needs to be taken into account and whether your End Hirer allows Limited Company working and has identified the role as inside or outside.

Yes - with recent changes to IR35 rules, many contractors are finding themselves needing to make the switch from operating as a limited company to working with a PAYE umbrella company. You can, of course, do this – and you can even maintain your limited company for the duration so you can continue working through a Limited Company on future assignments. However, you will of course need to avoid any trading as this limited company for the duration of your work with the umbrella company.

We have introduced a new solution called Flex that allows you to seamlessly switch between Limited and Umbrella working depending on your IR35 solution - find out more


FREE consultation and take home pay illustration

If you would like to understand more about your working options and how they affect you financially and the levels of day-to-day responsibility then you will find our free, no obligation consultation and take home pay illustration really helpful.

Simply tell us the sector you work in, your annual income or agency rate, hours per week and any business expenses you incur - and we'll do the rest!

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