Resolved: Umbrella Company vs Limited Company

For professionals wishing to break free from the shackles and demands of working for one organisation, contracting is an established route taken by hundreds of thousands of experts over the last two decades.

As with any decision, going solo comes with an upside and a downside. One of the downsides to contracting is the administration burden that comes with organizing your own finances. Luckily thousands of contractors have taken the plunge before you and asked the question “what is the best way to account for my time, invoice for my work, get paid and ultimately pay my taxes?”.

By far the two most popular answers to that questions are to:

  • set up and work through their own limited company
  • become an employee of an umbrella company and use their administration function to lift your admin burden


In this article, Umbrella Supermarket looks at the advantages and disadvantages of both types of structure.

The advantages of working through a Limited Company

Limited company contractors nearly always take home more after tax than umbrella contractors and full-time employees even if they’re earning the same money for their work. Although that advantage has been greatly reduced through the removal of the tax dividend credit in the mid-2010s.

Limited company contractors are more in control of their payroll than umbrella contractors. That said, with great power comes great responsibility so it’s always a good idea to engage an account to help you carry the load. An accountant can help you submit financial documents (like your annual accounts, self assessment form, and CT600 form) and pay your taxes on time. In fact, using an accountant will greatly cut back on the time required to fill in and submit the necessary documentation associated with running your own limited company.

Limited company contractors have a much greater degree of independence and flexibility. They aren’t going to be chased for a timesheet by their umbrella, and they can put multiple income sources through their Limited company. For example if you’re an IT contractor with secondary sources of income, you can also use your Ltd co to bill for this work.


The disadvantages of working through a Limited Company

As we alluded to in the previous section, there are significantly more administrative duties and obligations as a limited company director than as an umbrella contractor. There is additional paperwork too which you would normally expect with being self-employed including the issuing of invoices, chasing up late payments, keeping your bookkeeping software up to date, liaising with your accountant, organising insurance, and more.

Limited company contractors should expect to spend 15-30 minutes a day keeping on top of paperwork and other responsibilities. A failure to do so will mean that catching up so that your records are fully up-to-date becomes time-consuming, stressful, and confusing.

Not only should you expect to do extra book keeping but as a director of a Limited Company you’ll also be expected to file accounts and fill in a self-assessment at the end of the year too.

The advantages of using an umbrella company

Contractors using an umbrella company become the employees of that umbrella – even if they act like self-employed contractors. Nuances of definition aside, there are some distinct advantages to working as an employee of an umbrella company.

For a start, getting paid (less tax) happens just like when you were a permanent employee. In fact you not only get paid the same way, but your work will be covered by your Umbrellas insurance policy and as required by law your umbrella will provide you with access to a pension scheme.

The process of getting paid through an umbrella is far less complex than via a Limited Company. When on a placement with a client, you submit your timesheets to your umbrella together with your expenses – this is normally done online.

From the records you submit, your umbrella then raises an invoice for your work to the client. When the invoice is paid, you are paid a salary from which a number of deductions are made including income tax, both forms of National Insurance, expenses, other agreed costs, and the umbrella company’s fees, all of which are detailed on your payslip. At the end of each year, your umbrella company provides you with a P11d and a P60.

You have none of the financial responsibilities that a limited company contractor has. You do not have to issue invoices nor do you have to chase them. You don’t have to worry about IR35, marketing, accounts, insurance, and more.


The disadvantages of using an umbrella company

For all of the administrative burdens and responsibilities you will be glad to forego, there are a number of sacrifices you have to make. The biggest of those sacrifices is what you are left with after tax and other fees. A limited company contractor earning £60,000 a year will pay approximately £8,000 less in tax and other charges than an umbrella contractor will if the contract is outside IR35.

If your umbrella company fails, you may lose any money which it is handling on your behalf. HMRC may still require you to complete a self-assessment form and while, as an employee, you do have holiday entitlement, you will probably end up paying for your holidays yourself out of their fee (different umbrellas use different approaches on holiday pay – make sure you find a scheme that you feel happiest with).


What’s right for you?

If you believe that the vast majority of your contracts will be within the scope of the IR35 rules (we’ve written about this before), there is a strong argument to choose the umbrella route.

The difference in pay between what an umbrella contractor earns and a limited company contractor earns where the work carried out is within IR35 is far smaller than the difference we mentioned earlier in this article. Many argue that the lack of hassle and IR35 security offered by an Umbrella Company is the future for any contractor caught by IR35.

Umbrella contractors do not have to worry about IR35 in general whereas it’s becoming more and more of a pressing issue for limited company contractors and their clients, especially clients in the public sector or at medium- to large-sized businesses.


Find the right umbrella for you

There are hundreds of umbrella companies in the UK right now competing for your business but how do you sift through all of the offers to find the best one for you? The answer is to start your search through Umbrella Supermarket.

To start your search, please click here.

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