Umbrella vs Limited: Guide for Contractors

Umbrella vs Limited: Using an umbrella calculator to make the best decision

In the world of contracting, one of the biggest decisions faced by contractors is over the way they will contract. This can be under an umbrella company or through a limited company. Having a big impact on your daily working life, this is a decision that requires careful thought and consideration.

Each option has advantages and drawbacks that contractors must take into account but in general, contractors should aim to look at what is the most time and cost efficient option for them.

In this guide, Umbrella Supermarket weigh up the pros and cons of both the umbrella and limited company options, to help every contractor make a well-informed decision and find the best way of contracting for them.

Option 1: Umbrella Company

The first option for contractors is to operate under an umbrella company. This route is usually considered the easiest and most hassle-free way to work.

With this option, an umbrella company will hire the contractor as an employee of their company. In turn, the umbrella company will pay the contractor a salary under the PAYE tax system, take care of their tax obligations, process their invoices and provide them with statutory benefits enjoyed by all employees including holiday pay, sick pay, maternity and paternity pay and a workplace pension.

In return for these benefits, the contractor pays the umbrella company a fee.

Although enjoying the benefits enjoyed by an employee, the contractor still chooses which contracts they work on and when.

As we’ve mentioned, the main benefit of this option is that it is usually considered an easy and hassle-free way of contracting due to the fact that the contractor has no responsibility to carry out tricky tax calculations or the admin and paperwork required of running their own business as they would under a limited company.

Instead, umbrella contractors receive the freedom of choosing what contracts they work on and when, coupled with the ease of being paid through the PAYE system and benefits of receiving a range of statutory benefits.

Option 2: Limited Company

The other option for contractors is to work under a limited company. With this route, contractors will set up their own limited company and be self-employed. In turn, contractors will be required to file self-assessment tax returns and be responsible for running their own business.

The obvious drawbacks of this option are that limited company contractors have to calculate and file often tricky tax returns, sort out their own invoicing and complete all the paperwork and admin tasks involved in running a business. These contractors will not receive statutory benefits received by umbrella company contractors due to the fact that they are self-employed, which is also worth noting as this can have an impact on your lifestyle and finances.

However, the main advantage of this option is that it is often viewed as the more tax efficient option. This is due to the fact that limited company contractors can pay themselves a salary and also take payments as dividends which are usually taxed at a lower rate than PAYE.

Those are the main differences between the limited versus umbrella options, however, there is another main consideration to take into account – IR35.

IR35 considerations

For contractors considering the limited company route, perhaps one of the biggest drawbacks is IR35.

From 2017, IR35 rules changed for public sector contractors, meaning it was the client, not the contractor, who was responsible for determining the IR35 status of the contractor. If the contractor is deemed within IR35, it is the responsibility of the client to deduct the contractor’s tax and National Insurance contributions before they are paid their fee. This has seen many contractors being wrongly classified under IR35, paying PAYE tax contributions when they shouldn’t have been.

As of April 2021, further reforms to the legislation will mean it is also applied to the private sector. This is set to impact thousands of limited company contractors in the UK.

As a big drawback of the limited company route, this will obviously have a big impact on a contractor’s decision. On the other hand, this is not a problem faced by umbrella company contractors as they are paid through the PAYE system, IR35 does not apply to them.

How an umbrella calculator can help 

When it comes to deciding between limited company vs umbrella company, there’s a lot for contractors to consider.

Clearly, a big factor is how time efficient each option is. We have already looked at how umbrella companies usually save contractors a lot of time, taking on time consuming tasks like invoicing, tax, expenses and timesheets. On the other hand, limited company contractors must take on all these tasks themselves, focusing on running a business, filing for self-assessment all the while working on the contract at hand.

However, as well as how time efficient each option is, the other main consideration is how cost efficient each route is. This is where an umbrella calculator can help.

Using an umbrella company calculator

Umbrella calculators, such as Umbrella Supermarket’s, are quick and easy to use and will help you work out which option is more cost effective for you.

Enter your details and get results in just 2 minutes to see how much you could earn under different umbrella companies.

Input your contractor rate and you will be able to see a clear breakdown of what your take-home pay will be as well as any costs incurred, including tax, National Insurance contributions and fees paid to the umbrella company.

The great thing about an umbrella calculator is that it will show you what your take home pay will be based on several different umbrella companies, meaning contractors can find the best deal for them.

Limited company calculator 

To work out your take home pay under a limited company, you will need to use a different method.

Under a limited company, the most cost-effective route is to pay yourself a salary under the National Insurance Contributions threshold which will mean you do not need to pay income tax on this amount.

Next, you can take dividends up to the amount of £2000 which you will not pay tax on. Further dividends will be taxed at a lower threshold of 7.5% at the basic rate which is lower than the PAYE rate.

Now, you have an idea of your earnings under a limited company, you can compare it with your take home pay under an umbrella company to work out the most cost-effective option for you.

Let Umbrella Supermarket help

For those contractors who have opted for the umbrella company route, Umbrella Supermarket can help you find the best umbrella company for you. In just 2 minutes, contractors can find a list of the best umbrella companies based on their needs and preferences. Why not see what we can do for your contracting career today?

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