Limited Company vs. Umbrella – What’s Right for You?

When you decide to go down the route of a contracting career, there are many different things to think about. Of course, the excitement of the journey will leave you keen to get started, but there are some important considerations to make. One of the first big decisions that you have to make is whether you should opt to work through an umbrella company or go down the route of starting up your own business. It’s a serious consideration that you should make once you have armed yourself with all of the relevant information.

Both options will give you the freedom to spread your wings and break away from the monotony of traditional employment. Despite this, there are differences in the amount of responsibility that you will need to manage when you do so. Of course, becoming a new contractor will need to understand which option will work best for you, but we have created this guide that can point you in the right direction.

Therefore, if you read on, you will be able to gain an understanding of the differences between the two options, making it easier for you to make an informed decision. Limited Company vs. Umbrella, what’s right for you?

Why an Umbrella Company?

Many people who decide to follow a career in contracting will often opt for the umbrella company route. This is because of the simplicity that it offers as the company will manage your Income Tax and National Insurance, giving you the freedom and focus to concentrate on delivering your projects and assignments on time.

When you choose to use a reputable and compliant company, you will be given a contract of employment. This means that you will be able to take advantage of the rights and benefits that a permanent employee would be given, including the likes of holiday pay, sick, maternity and paternity pay too, providing complete reassurance while ensuring you are not left out of pocket.

Along with all of this, you will also make claims for business costs and expenses that are considered legitimate, providing they were incurred during the time you spend working on a project. The type of project you are working on will determine the types of costs and expenses you can claim and be reimbursed for. This comes down to whether the project is subject to supervision, direction, or control.

You won’t have to concern yourself with the complexities of IR35 either as an umbrella company won’t be impacted. So, what can you expect when you choose an umbrella company?

  • They will manage all aspects of tax and contractual obligations as well as the legal aspect and employment elements of being employed
  • You have the potential to earn more when compared to permanent employment
  • You’ll have the ability to make claims for all legitimate business costs and expenses
  • Administration duties will be significantly reduced, helping you to save time and effort when compared to being the director of a company
  • You’ll be paid faster and more accurately while it will also be paid on time
  • You will have access to employment rights and all types of insurance, such as professional indemnity, employers, and public liability.

Why a Limited Company?

One of the most commonly known facts of running a limited company is the fact that company directors have the potential to earn more money, although the ability to do so will come with more effort. You will be considered self-employed, which means that you are independent, and with that comes the intricacies of running a business as well as the administrative tasks that can include:

  • The requirement to register yourself as a director of a company while ensuring you inform Companies House of all accounts and any changes that are made to your company
  • You will be required to open a business bank account that is used solely for business purposes
  • You’ll be in charge of managing invoices for agencies or clients
  • You will handle all communication, and that includes liaising with HMRC, accountants, Companies House, and any other organisation that you work with
  • You will be required to ensure that all documentation and tax returns are filed on time
  • Detail accounts as well as invoicing and VAT records will need to be produced
  • Your self-assessment tax return will need to be completed and returned on an annual basis
  • All tax on dividends will need to be paid
  • Corporation Tax returns will also need to be submitted and paid accurately
  • IR35 reviews will need to be conducted regularly to ensure that you adhere to the law.

While this might seem like a detailed guide, it aims to ensure that you are informed and clear about the differences between the two. This will provide clarity over what a limited company vs. umbrella consists of. This will enable you to make an informed decision and make the right choice based on your needs and requirements as a contractor.

    Leave a Reply