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Limited Company VS Umbrella Company

Information for Contractors

Whether you’re new to contracting or looking to find out the best business and payroll option for you, there are various  advantages and disadvantages to setting up a limited company or using an umbrella company. Most contractors want to know if they will be better off with a limited company or an umbrella service.

Realistically the option you choose should be based entirely on your individual requirements. We can offer you advice and guide you through each option, to help you make an informed decision that is best suited to your requirements.

Limited Company

Contractors decide to set up and run their own limited company due to the financial advantages. When you choose a limited company, you become both the director and the shareholder of the company and pay yourself using a combination of dividend and salary. Running a limited company is the most tax efficient payroll option. The rate you take home is favourable in comparison to using an umbrella company service.

One of the disadvantages to running a limited company is the time and paperwork. This is why contractors opt to use specialist contractor accountants.

Umbrella Company

This option provides a quick and hassle free way of setting up a payroll solution. This is a simple method to receive payments from your client with minimum administration and paperwork. If you decide to join an umbrella company you will become an employee of the scheme. You will receive payments through PAYE. The umbrella company is responsible for invoicing the client and making sure that you receive salary after deductions for tax, national insurance and the umbrella fee.

Using this option is ideal for short term contracts or if you do not want any form of administration, as the system is easy to use.

It is important to know that when you choose an umbrella company, you will not qualify for the same advantages as a contractor that runs their own limited company for example you you won’t qualify for a payment such as dividends.

Limited Company VS Umbrella Company

Advantages

  1. The most tax efficient way of working.
  2. Claim a wider range of expenses.
  3. Access to the Flat Rate VAT scheme.
  4. You keep complete control of your financial affairs meaning you do not have to risk your money with any third party administrator.
  5. Running your own business isn’t difficult; submit spreadsheets to your accountant – just like umbrella time-sheets and expenses.
  6. Greater opportunity for tax planning.

Advantages

  1. Easy to use; simply enter your timesheet and expense details and wait to be paid.
  2. Tax and NI is deducted before you receive your money.
  3. Ideal for short term contracts.
  4. Ideal for short term contracts or those less than £25k per year.
  5. Good if you are unsure if contracting is for you and you’re really just in between permanent jobs.
  6. Someone else will be doing all the paperwork.

Negatives

  1. There is a certain amount of paperwork involved, usually about 15- 20 minutes per month.
  2. Can be costly for short term contracts or those less than £25k per year.

Negatives

  1. The most expensive way of working. You receive a salary that is subject to PAYE Tax and NI, it’s just like being a permanent member of staff again.
  2. You are reliant on the umbrella company to collect your money from the client or agent and then to pay it on to you.

How we can help

If you choose us, we could set up a limited company for you along with setting up payroll and registering the company for Corporation Tax and VAT.

We offer all inclusive low cost fixed fee accountancy packages starting from a fixed fee of £100 plus VAT per month. These include completion of accounts, payroll bureau, dividends and corporation tax computations, personal taxation, and submission of all company returns.

If you are looking to switch over to us we will take care of the authorisation process and ensure that the transition is smooth.