Limited or Umbrella? Which route should you take?

Limited or Umbrella? It’s a question that we get asked a lot! As a contractor, the first thing you need to do is determine how you are going trade, and that is exactly why we have constructed this comprehensive, yet easy to read guide.

As experts in contractor accountancy, Contractor Accountants Online have a wealth of experience in managing the tax and accountancy affairs of contractors across the UK. If you have any questions about our services, call one of our friendly experts on 020 7481 4743 and they will be happy to help.

There are a number of factors to consider when choosing between registering a limited company or working through an umbrella company, these include:

  • The length of your contracts
  • How much you expect to be paid
  • Whether you are prepared to do a little extra admin each month
  • Individual preferences

Limited company contracting

In a nutshell, a limited company is generally considered one of the most tax efficient ways for a contractor operate, and our experts can get your limited company incorporated within 24 hours.

Once your company is registered and your business bank account set-up is complete, you can start trading as the director of the company. You will be in control of invoicing and deciding how much to pay yourself through a combination of salary and dividends.

Featured below are some key advantages and disadvantages of owning a limited company

Advantages of a limited company

  • The most tax efficient way of working – When working through a limited company you can expect to take home between 75% and 80% of your income.
  • Greater flexibility with expenses – You will have the ability to claim a larger range of expenses, which can be offset against your tax liability. Common expenses include training, travel and equipment.
  • Limited liability – As the owner of a limited company you are considered a separate entity to the company. As a result, if the company was unfortunate enough to not keep up with debt repayments, you aren’t personally liable.
  • Greater tax planning opportunities – There are far greater tax planning opportunities available to you as a limited company. Our friendly accountants will be able to discuss these in more detail with you.

Disadvantages of a limited company

  • Certain amount of paperwork – You’ll need to do a certain amount of paperwork and admin, usually only about 15 minutes per month.
  • Not ideal for contacts below 25k per year – As we said earlier, there are some fantastic tax planning benefits that come hand in hand with a limited company. If your contract is below 25k per year, you won’t be able to make the most of these.

Umbrella Company contracting

An umbrella company is quite different to being the owner of a limited company. For starters, you don’t need to register as self-employed. You will be employed directly by the umbrella company and they will pay you as a PAYE employee. This means that they will handle all of your invoices (usually you just need to submit a timesheet each month) and you won’t have to submit a tax return at the end of the year.

We have outlined some key advantages and disadvantages of Umbrella Company contracting to give you a more comprehensive overview.

Advantages of umbrella companies 

  • Simplicity – Umbrella companies come with minimal paperwork. All you need to do is complete a timesheet and any allowable expenses that you wish to claim. Ultimately you have more time for the day-to-day demands of your job.
  • All tax and NI is deducted – There is no need to worry about setting aside a little each month for tax and national insurance payments. The umbrella company does all of this for you, so the money you get paid is yours to keep.
  • Ideal for short term contracts – If you are on a short term contract umbrella companies are ideal because you don’t have to worry about completing a tax return at the end of they year for just a few months work.

Disadvantages of umbrella companies

  • The most expensive way of working – Through an umbrella company your take home pay is far lower, usually 60% to 65%.
  • You are subject to the umbrella company’s invoicing procedure – You have no control over invoicing, so you have to rely on the umbrella company to process your payments correctly and on time.

If you have any questions about whether you should go limited or umbrella, our experts are always on hand to help, call us on 020 7481 4743.

Now that you have a better idea about the differences between a limited company and an umbrella company, you might also find the following pages useful.

Our all-inclusive, fixed-fee package starts at just £55 per month.