Which working option is best for me – Limited company or Umbrella company?

One of the first decisions you’ll need to make as a contractor is whether to set up your own limited company, or work as an employee through an umbrella company. As a limited company director you’ll have greater autonomy, but also more responsibility.

One of the big advantages of working for an umbrella company is that they take care of your tax and National Insurance deductions, as well as other onerous administrative tasks, leaving you free to focus on your contracts.

How does an umbrella company work?

As we mentioned, an umbrella company carries out much of the administrative contractor paperwork on your behalf. All you have to do is submit your timesheets, and the umbrella company sends invoices to your client.

In terms of payroll activity, the umbrella company acts as an intermediary between yourself and your clients, receiving payments and then passing them on to you. They should provide you with an employment contract, and will ensure the correct PAYE and National Insurance deductions are made from your income.

A fee is charged by the umbrella company for their services, and this is taken from your monthly earnings.

Advantages and disadvantages of working for an umbrella company

Advantages

·         Frees up time to concentrate on your contract work

·         Because you’re an employee, you can claim a range of employment rights such as holiday pay and sick pay

·         Tax, legal and contractual requirements are met

·         You can claim some business expenses

·         It’s a simple, straightforward system

Disadvantages

·         Not as tax efficient as running your own limited company

·         Take home pay will be reduced by the umbrella company’s fee

·         You’re reliant on someone else to ensure your tax and NI deductions are correct

Should you set up your own limited company?

Some contractors prefer to have autonomy in every area of their working life, and a limited company structure allows for this. It is also a more tax-efficient way of working as a contractor, as your income can consist of a mixture of salary and dividends rather than purely via the PAYE system. 

You have to take on more responsibility as a company director, but with this comes greater control. You must submit limited company accounts and other annual statutory returns when you run a limited company, but may feel the additional administration is worthwhile.

Advantages and disadvantages of setting up your own limited company

Advantages

·         Complete control over your financial affairs

·         It’s more tax efficient than using an umbrella company

·         You gain access to HMRC’s Flat Rate VAT scheme which simplifies your payments

·         You can claim more business expenses

·         You can choose when you withdraw money from the company, which makes tax planning easier

·         There are no third-party fees to pay

·         You enjoy limited liability as a company director

Disadvantages

·         The administrative aspect can be a burden

·         You’ll need an accountant to complete your company accounts

·         You have more responsibility

·         It is more complex to set up than working for an umbrella company

Working through an umbrella company might suit you if you’re unsure whether contracting is right for you - you can ‘test the water’ without the responsibility of running your own limited company. Also, it’s a good option if you want to focus on work without the distractions of dealing with tax and paperwork.   

Find out more about contracting through an umbrella company and running your own limited company, from a reliable accountant in your area. Handpicked Accountants can connect you with a professional accountancy practice to ensure you understand all your options.