Umbrella vs Limited Company: What to know when making the move this new tax year

Everything contractors need to know about Umbrella vs. Limited


Limited Company vs. Umbrella: What’s the difference?

Let’s first look at what an umbrella company is.

Operating through an umbrella company is often considered the easiest, most hassle-free way of contracting.

The umbrella company employs the contractor, however, they still maintain the freedom to choose which contracts they work on, when and with which clients.

As the contractors’ employee, the umbrella company will pay the contractor a salary, work out and deduct their tax through the pay-as-you-earn (PAYE) system, process their invoices and give them statutory benefits, including holiday pay, sick pay, maternity/paternity leave and a workplace pension.

In exchange, the contractor pays the umbrella company a fee. 

Although this is an extra cost to contractors, it is worth considering that the umbrella company fee is considered a legitimate expense by HMRC and therefore can be deducted from your salary before it is processed through PAYE.

The second option is to operate through a limited company.

With this route, rather than being an employee, the contractor operates on a self-employed basis, usually through their own limited company.

As a self-employed, off-payroll worker, the limited company contractor will instead be required to file for self-assessment and pay tax after they have received their fee from the client, rather than paying as they earn like an umbrella contractor.

Self-assessment can often be tricky and complex, so many limited company contractors instead opt to use the services of an accountant to help with calculations. It is worth bearing in mind that this is an additional cost to the contractor.

Limited company contractors must also ensure they have enough money to cover their tax bill at the end of the year, keeping a portion of their earnings aside for this which requires careful planning.

Furthermore, a limited company contractor also takes on the responsibilities of setting up and running a business, taking on all tasks associated with this, such as admin, paperwork and invoicing which can take up a lot of a contractor’s time and energy.

Another factor to consider is that self-employed contractors aren’t entitled to statutory benefits like umbrella company contractors are. This means that if they should unexpectedly fall ill, or even just want to take a break, they will have to cover the costs of doing so themselves.

The final factor to account for when deciding between limited company vs umbrella is IR35.

IR35 is a piece of legislation that was set-up to stop workers such as contractors from operating as employees but taking advantage of the tax and National Insurance benefits enjoyed by the self-employed.

Recent changes to IR35 have made it the responsibility of the client in the private sector, and not the contractor, to deduct the contractor’s tax and National Insurance contributions before they are paid their fee.

This will lead to thousands of contractors being wrongly classified under the legislation, meaning they will pay more in PAYE tax contributions than they need, without benefiting from the perks of employment.

This is a major drawback of the limited company option and has meant that thousands of limited company contractors operating within the private sector are now looking to make the move to umbrella.

Making the move to umbrella: everything you need to know

If you are now considering making the move to umbrella, there are several factors you must account for when choosing which umbrella company to work with, including:

  • Service level: every contractor has a different set of needs and requirements, meaning it’s important to look at what services different companies offer in order to find the best fit for you.
  • Take-home pay: contractors work hard so inevitably, take home pay will have an impact on which umbrella company you opt to use. That’s why we make it easy for contractors to compare umbrella companies based on take-home pay, offering a clear breakdown of how much you will pay in tax, National Insurance, pension contributions and umbrella fees.
  • Umbrella fees: likewise, it’s important to look at how much you will pay in umbrella company fees, to ensure you are getting a fair deal. Again, our umbrella calculator makes it quick and easy to compare companies based on how much they charge in fees and what the contractor will receive in return for the fee.
  • Reputation: it’s important that you do your research to ensure the umbrella company you are choosing has a sound reputation and is trust Although the majority of umbrella companies are, just as in any industry, there are those that aren’t. That’s why we only ever work with umbrella companies we know we can trust, so you can rest assured that you are making the right decision.

Ready to find the best umbrella company? Umbrella Supermarket’s umbrella calculator is here to help

If you are looking to make the move to umbrella in 2021, our quick and easy to use umbrella calculator can help you compare umbrella companies so you can find the best umbrella company for you.

We’ve helped thousands of contractors find the perfect umbrella company for their needs and requirements, whatever they are looking for, whether it’s help with things like childcare credits or same day payments, we can help you find it in a matter of minutes.

Simply start by entering a few key details and we will do the rest. Ready to find the best umbrella company for you?

Would you like more information on Umbrella vs Limited Company: What to know when making the move this new tax year?

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