Umbrella Company vs Limited Company – Which is Right For You?

Find Out with Our ‘Everything You Need To Know’ Guide!

Without comprehensive information to help you to make an informed decision, deciding whether to trade using an umbrella company or a limited company could cause you many a sleepless night. Fortunately, once you’ve read this article you will be armed with all of the information needed to decide whether an umbrella company or a limited company is right for you.

Fortunately, once you’ve read this article and are armed with ALL the necessary information, the decision on whether to go Umbrella or Limited Company should be an obvious choice for your scenario.

(If you are in a rush though, drop down to the ‘At a Glance’ section for a quick summary or click to watch the video below)

Often the answer lies in your motivation for deciding to become a contractor. However, we will come back to that in a moment. First of all, let’s look at the fundamental differences between the two.

An umbrella company is essentially an invoicing vehicle for contractors who want to avoid the administration duties normally associated with contracting, namely issuing invoices, chasing payments from clients/agencies, calculating tax and National Insurance (NI) contributions and making payments to their bank account. It’s worth noting that because you are employed by the umbrella company, IR35 legislation does not apply.

Contractors who work through an umbrella service will submit timesheets and expenses (normally online) and then leave the rest up to the umbrella company. They will generate and send invoices to the agency or client, chase payment when it’s due and then upon receipt of payment will calculate your tax and NI and transfer your net pay direct to your bank account.

Whilst previously contractors were able to claim travel and subsistence expenses through an umbrella company, the ability to do this was removed on 6th April 2016 as part of the Chancellor's Autumn Statement on 25th November 2015.

Limited Company (or Personal Service Company)

With a limited company, or a personal service company as it sometimes also known, you will have complete control of the day-to-day running of your company. You will become a director and shareholder, and will have complete control over every aspect of your company including its bank accounts and financial affairs.

Provided your contract falls outside of IR35 (i.e. you're not deemed to be an employee of the client using a limited company as a disguise) you will also be able to draw dividends from the company which are not subject to NI contributions.

Working through your own limited company is often the most tax efficient method of contracting and will allow you to keep more of your income. However, again these tax advantages are wholly dependant on whether your contract falls inside or outside of IR35. Despite this, many contractors decide against starting a limited company because of the day to day administration and the legal requirements all limited companies have to comply with.

Providing an alternative to this though, our Freestyle contractor limited company accountancy service removes the administrative burden of setting up and running a limited company.

As part of this service, everything from company formation, the setting up of your bank account through to invoicing your clients, monthly payroll, annual account preparation and corporation tax returns are all included.

As a contractor, you simply enter your expenses and invoices online and we will handle everything else and provide you with an up to date live position of your company’s financial situation.

For more detailed information on setting up your limited company, then please read our contracting through a limited company guide.

Umbrella Company

Unfortunately, there are little benefits for individual contractors in terms of reducing tax liabilities. Due to this, contracting through an umbrella services company allows you to receive in the region of 60% of your earnings. You should also consider that umbrella companies’ service fees can be up to 9% of the value of your contract. For further details about this, see our ‘Income Illustration Examples’below.

Limited Company

Contracting through your own Limited Company will typically allow you to receive approximately 75-90% of your earnings, depending on your contract expenses and individual circumstances.

As previously mentioned, provided your contract falls outside of IR35 legislation you may pay yourself a small salary and then draw dividends from the company which are not subject to NI contributions.

This together with the ability to claim back a wider range of contract expenses (e.g. accountancy fees, training, equipment & software costs) and access to a VAT scheme known as the flat rate scheme, makes the limited company the most tax efficient way of working and in turn the most attractive option for maximising your income.

* Your personal income percentage will depend on a number of factors including the amount of expenses you incur.

Decided to go Limited? Here are a Few Tips on choosing the right Service Provider

• Use a Reputable Firm of “Qualified” Accountants

It is vitally important that you do your research and ensure that you choose a reputable service provider for your chosen route. If you are setting up a limited Company then make sure that the accountancy firm you choose use fully qualified accountants.

It’s always worth confirming what tax or accountancy qualifications their firm holds. The contracting industry is awash with accountancy firms that are unqualified, and more importantly, unregulated.

• Check If There Are Any Hidden Fees or Minimum Period

Remember to clarify at the outset exactly what is included in their all-inclusive package and any additional costs that may be incurred. You should also check whether there is a minimum charge/minimum time period for which you need to employ their services.

Hopefully this article has provided you with some insight as to the most suitable trading option for you and saved a few sleepless nights. However, should you have any further questions or would simply like a free no obligation opportunity to talk through your own scenario before finalising your choice, please do not hesitate to call one of our dedicated advisors at Freestyle Accounting on 02476 426360 or complete the form opposite.

Further information about contracting through a limited company can be found in the following articles:

Why contract through a limited company? - Part 1

Why contract through a limited company? - Part 2

Best of luck with your Contracting endeavours!

The team at Freestyle Accounting