Almost all contractors who provide professional services to clients trade via their own limited companies, or join PAYE umbrella schemes. Here we’ve compiled a table to help compare the pros and cons of each structure.
Umbrella / Limited – Pros and Cons
| 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 | Your entire salary is taxed via PAYE. Less tax efficient than working via a limited company. Use our comparison calculator. |
| IR35 | If caught, most (but not all) the tax benefits of being limited are lost. | IR35 is irrelevant, as you are already taxed as an ’employee’. |
| Ease of Use | Monthly admin required to help compile accounts, some annual obligations as company director. | Very little admin. |
| Legal Duties | Directors have a number of statutory and financial duties. | No legal duties. |
| 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 with 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. |
| 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. |
| VAT | Joining the Flat Rate VAT scheme can be profitable – including a discounted rate in the first year. | 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. |
| 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. |
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 your started right away.
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