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
|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 you started right away. For umbrella company providers, try our directory.
- Tax-efficient protection for contractors - life insurance and income protection - your company pays the premiums.
- Need a new accountant? - compare 30+ specialist firms
- Switch between umbrella and limited - flexible solution from Nixon Williams for contractors who may be affected by the Off-Payroll changes.