Umbrella Company vs Limited Company

Find out the difference between an umbrella company and a limited company by contacting the helpful experts at Company Formations 24.7 today.

Each year, many contractors are faced with the choice for operating via an umbrella company or limited company.

Sole trader or limited company?

There are benefits to both methods, although when closely analysing the differences between an umbrella or limited company, it can be seen that the latter is far more advantageous. When you work through an umbrella company, you essentially become an “employee.” You log your hours and submit your invoice, and then just as an employer would, the umbrella company pays out your salary less tax, National Insurance contributions, expenses, and normally a fee for their services. This is often appealing to contractors who want a straightforward way of working without the hassle of running a limited company, or for those who are contracting in the short term.

However, as the director of a limited company, you are able to keep more of your take-home pay when compared with an umbrella scheme. When looking at a limited company vs umbrella company in terms of tax efficiency and your financial standing, a limited company can be seen to offer long-term contractors a great deal more.

An umbrella company vs limited company – what’s the difference?

An easy way to examine the difference between a limited company or umbrella scheme is to look at the comparisons below:

Limited Company

Umbrella Company

As you can enjoy more allowances and exemptions as a limited company, it is generally regarded as the most tax efficient way of trading.

An umbrella company is often termed the most expensive way of working, as you are not subject to the same tax relief as you are in effect a full-time employee again. This means paying full PAYE Tax and National Insurance on your saIary, and so as these deductions are already made, you are not liable to pay anything further and what you receive is your take-home pay.

A limited company is ideal if you are committed to running your own business and working for yourself in the long-term. It can be quite a costly and time-consuming venture to formulate a company only to have to dissolve it shortly thereafter to return to contracting or full-time employment.

An umbrella company is an ideal solution for those who are contracting in the interim or for a short period of time, and is great for contracts worth £25K or less.

As you are in total control of your finances, you are liable for the collection of all debts and the payment of salaries along with corporation tax.

You are reliant on the umbrella company to collect the money owed and pay it to you as required.

There is a lot of paperwork and administration that accompanies being the director of a limited company, although if you work alongside an accountant, there shouldn’t be too much additional paperwork beyond tracking your income and expenditure.

An umbrella scheme requires virtually nothing on your behalf beyond entering your hours worked and your expenses into the system.

You can keep more of your take-home pay with a limited company, a figure that is typically 75-80% of what you earn.

You can keep approximately 60-65% of your total earnings if you work through an umbrella company.

If you are contracting privately through your own business, you could be at risk of being investigated under IR35 legislation, which seeks to clamp down on contractors that could be considered to be working as full-time employees.

Members of an umbrella scheme are protected as they are taxed as though they were inside IR35, and so you will not have to worry about being investigated or reprimanded.

If you still have questions about an umbrella vs limited company, along with which is right for you, seeking tax advice from an accountant will give you the opportunity to gain expert advice and have your questions answered.

Didn't find what you were looking for

Any Questions? Call Us FREE! 0808 168 3676

Didn't find what you were looking for? Call FREE to speak with on our helpful advisers, we're here to answer your questions...