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Umbrella vs Limited Company Pros and Cons

Umbrella vs Limited Company: Your Options Explained

When it comes to umbrella vs limited company, each option has its unique advantages and drawbacks that contractors should take into account when making their decision. To help, Umbrella Supermarket has put together this handy guide explaining the pros and cons of each option, to help every contractor make the right choice.

Umbrella vs Limited Company: Your Options Explained

Firstly, let’s look at what the two options look like.

One route contractors can take is to operate under an umbrella company.

Under the umbrella route, contractors are employed by an umbrella company who puts them on their payroll. The contractor sources and secures their own work, but is then paid a salary by the umbrella company who consequently deducts the tax and National Insurance owed by the contractor under the PAYE system.

As the contractor is employed by the umbrella company, they, in turn, receive the same statutory benefits enjoyed by all employees, including sick pay, holiday pay, a workplace pension and maternity or paternity leave.

In exchange for these services and range of benefits, the contractor pays the umbrella company a fee.

That’s what the umbrella route involves, so what does working under a limited company look like?

With the limited company route, a contractor sets up their own company and is therefore self-employed. In turn, they are responsible for securing their work and invoicing the client. They will be paid by the client directly, and therefore take on the responsibilities of running a business, inclusive of accounting, admin and paperwork. They will pay tax and National Insurance through self-assessment rather than PAYE.

Those are the two main options, but how can contractors choose the best route for them?

Next, we will look at both the pros and cons of each route to help you decide.

Umbrella Company: Pros

The pros of working under an umbrella company are many and varied. Some of the main pros of this option include:

  • Umbrella Companies are typically considered the easiest and most hassle-free way of contracting. Being employed by the umbrella company means the contractor doesn’t need to worry about invoicing clients or chasing up payments. Instead, they can get on with the contract at hand and leave the rest to the umbrella company to sort out.
  • Umbrella contractors do not need to worry about filing for self-assessment. Unlike limited company contractors, umbrella contractors pay tax via the PAYE system, arguably the easiest way of doing so. This means no tricky tax calculations required when filing for self-assessment.
  • Umbrella contractors receive statutory benefits. Unlike limited company contractors, umbrella contractors receive holiday pay, sick pay, pension contributions and maternity or paternity leave meaning no unpaid leave.
  • With this route, contractors do not need to worry about being caught out by IR35. As the contractor is employed by the umbrella company, they are automatically exempt from IR35.

Umbrella Company: Cons

The cons of working under an umbrella company include:

  • In exchange for being employed by the umbrella company and receiving a range of benefits from them, the contractor must pay the umbrella company a fee. This is an additional cost that limited company contractors will not incur. Umbrella company fees can vary from company to company, but on average, the contractor can expect to pay anything from £15 per week.

 

Limited Company: Pros

Those are the main pros and cons of an umbrella company, now let’s look at the pros of a limited company:

  • The main pro of this option is that it can typically be more tax-efficient than the umbrella company route. This is because contractors can pay themselves a salary under their own limited company, and take payments as dividends which are taxed at a lower rate. This works when the contractor pays themselves a salary under the National Insurance contributions threshold which they do not need to pay income tax on, and then takes dividends up to £2000 which they will not pay tax on. Any further dividends the contractor takes is then taxed at 5% at the basic rate, much lower than the basic PAYE tax rate.

Limited Company: Cons

The main cons of operating through a limited company include:

  • Having set up a limited company, contractors will be responsible for running their own business, including admin, paperwork, invoicing the client and chasing payments. This is on top of the contract they are working on at the time which takes extra time and energy.
  • Limited company contractors must pay tax through self-assessment, typically considered the more complex way. Because of this, many limited company contractors end up using the services of an accountant which is an additional cost.
  • Unlike umbrella company contractors who are exempt from IR35, limited company contractors are not. As of April 2021, reforms to IR35 legislation will mean that it will apply to the private sector as well as the public sector. This means that it will be the responsibility of the client, not the contractor, to deduct the contractor’s tax and National Insurance before they are paid their fee. This is set to badly impact thousands of limited company contractors wrongly classified under IR35 meaning they will lose the tax-efficient benefits of working through this route.

Having weighed up both the pros and cons of limited company vs umbrella company, contractors can make an informed decision on the best route forward for them.

For those contractors that have opted for the umbrella company route, the next step is to find the best umbrella company to work with.

Let Umbrella Supermarket help

With Umbrella Supermarket’s quick and easy to use umbrella calculator, contractors can find the perfect umbrella company for their needs in a matter of minutes. Simply input your details, contractor requirements and daily rate and we will show you a list of the best-suited umbrella companies, as well as how much you will take home under each. Why not see what we can do for you today?

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Umbrella companies offer an easy way to contract and remove the need for the contractors to worry about the burdens of admin, finances, tax and IR35, all things that limited company contractors have to deal with.

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