Almost all contractors who provide professional services to clients trade via their own limited companies, or join a PAYE umbrella. Here we’ve compiled a table to help compare the pros and cons of each structure.
Umbrella / Limited – Advantages and Disadvantages
| Limited | Umbrella | |
|---|---|---|
| Service Provider Costs | You pay a monthly fee to your accountant to manage your company’s tax affairs. | You pay a weekly or monthly fee (margin) to the umbrella company. |
| Tax Efficiency | The most tax-efficient way to contract. Most directors take a low salary. No National Insurance is payable on dividends. The tax advantage has decreased significantly in recent years, particularly due to the April 2016 dividend tax hike. | Your entire salary is taxed via PAYE. Less tax-efficient than working via a limited company. |
| IR35 | If caught, most (but not all) of the tax benefits of being limited are lost. | IR35 is irrelevant, as you are already taxed as an ’employee’. Many contractors are now forced to work via umbrella companies following the April 2021 ‘Off Payroll’ (IR35) rule rollout. |
| Ease of Use | Monthly admin required to help compile accounts, some annual obligations as a company director. | Very little admin. |
| Legal Duties | Directors have a number of statutory and financial duties. | No legal duties beyond those of any other individual taxpayer. |
| Set Up | Company formation can be completed in a few hours, accountancy set-up should be rapid with a contractor specialist. Registration for taxes (VAT, Corporation Tax) can take a few weeks. | Instant set-up via a contractor specialist. |
| Your Status | You are the director of your own company. | You are an employee of the umbrella company. |
| Duration | Not ideal for short-term contracts, due to admin required to set up and then subsequently close the company. | Good for short-term contracts. |
| Tax Planning | Highly flexible, dividends can be timed to maximise use of lower tax bands. | Few tax planning opportunities are available. |
| Timesheets / Invoices | You invoice the agency for work done on behalf of your company. | You submit your timesheet to the umbrella. The umbrella invoices the agency. The agency will pay you your net weekly/monthly income, after deductions. |
| Control | You have a high degree of control over your business. | Little control. |
| Low earning contracts | Not generally recommended for contracts paying under £15/hour | Good for lower-paid contracts. |
| Paying Taxes | You are responsible for ensuring your company and personal taxes are paid on time. | The umbrella company deducts taxes before you are paid (income tax, National Insurance). |
| VAT | Joining the Flat Rate VAT scheme can be profitable – including a discounted rate in the first year, however most small companies can no longer access this scheme. | VAT is collected by the umbrella, no extra benefit to contractor. |
| Insurance | Your company needs to pay for business insurances (e.g. Professional Indemnity) | Insurance cover is typically included in umbrella fee. |
| Expenses | Higher scope to offset expenses against the company’s tax bill. | More restrictive scope to reclaim expenses, particularly if your contract falls under the SDC (Supervision, Direction, Control) rules. |
| Business Ventures | Essential if you want to run your own business, or expand beyond contracting at some stage. | You are an employee. Not suitable for trading outside contracting. |
| Banking | You must open a separate business bank account for your company. | You only need to keep your own personal bank account. |
| Self Assessment | All company directors must complete an annual tax return. | No need to complete a tax return unless you earn untaxed income in addition to your umbrella earnings. |
| Image | Conveys a professional image – may be helpful in certain contracting fields (e.g. interim management). | No particular professionalism attached. Not an issue for many umbrella contractors. |
| Testing the Water | May be better off using an umbrella if going limited appears daunting at first. | Ideal if you want to try out contracting before making a decision on the best business structure. |
| Multiple clients | Good if you intend to provide services to multiple clients. | Not ideal if you plan to work for several clients at the same time. |
Not always a simple choice
As a result of the rollout of the April 2021 Off-Payroll rules to private sector companies, many end-clients have applied ‘blanket bans’ on the use of limited company contractors, often because they are reluctant to take on the responsibilities of determining the employment status of contractors.
Therefore, you may not always have a choice over which business structure to use; typically you will be asked to work via an umbrella company – possibly one from your client or recruiter’s preferred supplier list (PSL).
We recommend you take a look at these articles for further information:
- Can you trust umbrella company reviews?
- The lowdown on umbrella company costs
- Limited company or Umbrella? Which is the best route?
Do you need an umbrella or limited company?
If you want to work as a limited company contractor, take a look at our list of recommended accountants who will be able to get you started right away. For umbrella company providers, try our directory.
Recommended Contractor Accountants
- SG Accounting - Join SG and get first 3 months @ £59.50pm
- Clever Accounts - IR35 FLEX. Take on any contract you're offered
- Aardvark Accounting - Complete service just £89/month
- Integro Accounting - 6 months fixed fee accountancy service half price!