Limited vs Umbrella

In the following paragraphs we will break down the key elements of a limited vs umbrella company; providing you with a more transparent view. You can then make a more informed decision about whether a limited company or umbrella company would be best suited for your individual needs.

Limited Company

As any contractor accountant will tell you, the most tax efficient way of trading is to work through a limited company. Typically, you can retain 75% to 80% of your gross income and there are a wide range of tax saving benefits that you can take advantage of.

When you take this into account, it’s no surprise that many contractors opt to operate through a limited company.

Another key advantage of working through a limited company is the limited liability status that you will receive. In a nutshell, this means that should your company be unable to keep up with its debt repayments, you aren’t personally liable.

However, the limited company route isn’t right for everyone. As a general rule of thumb, it isn’t recommended if you make less than £25,000 per annum. This is because you won’t be able to capitalise on all the tax saving opportunities that are available.

Limited companies come with a little bit of extra paperwork each month but this shouldn’t amount to more than 15 minutes or so. If you hire a good contractor accountant they will be able to lighten the load for you and ensure that your administrative duties are as pain free as possible.

Umbrella Company Employment

Umbrella companies work differently to limited companies. You’ll still work as a contractor, but you’ll be employed by the umbrella company.

The umbrella company will invoice the client for the work that you complete as their employee. They will then cover their costs from the money that they receive from that invoice. After that they can then pay you; and this will be through PAYE as an employee. All tax and NI will be deducted before you are paid.

As the umbrella company is your employer, they’re responsible for paying you statutory payments such as: sick pay and maternity/paternity pay; they’ll have to offer a workplace pension; and they must provide you with holiday pay. These costs are often recovered from the amount the umbrella is paid for your work, along with employers’ national insurance, and their profit margin. It is therefore important that you make sure you receive a comprehensive pay illustration, including all deductions, before you sign up.

If you only plan to be contracting for a short period, the umbrella company route is often ideal, as you won’t have to worry about setting up a limited company and paying the fees to do so.

The most obvious drawback of the umbrella route is the difference in take home pay. If you choose to contract through an umbrella company, you can expect to take home around 60% to 65% of the gross invoice value.

Conclusion

So in short, when considering the limited vs umbrella company question there are two key aspects to consider: the amount you expect to earn; the length of your contract. Ask a good quality umbrella company or an experienced contractor accountant to help you out with crunching the numbers before you make your decision.

A word of warning

There is no legitimate way for an umbrella company to pay you a take-home figure of more than 60% – 65% of the invoice value. However, not every company using the name “umbrella company” is legitimate. If you are quoted a higher take-home figure, the umbrella is almost certainly using an aggressive tax avoidance scheme, which will ultimately cost you money and cause you serious problems later down the line.