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Umbrella vs. Limited – which is the best option for me?

When working as a contractor, freelancer or consultant, you’ll quickly run into the question of how you should be paid – you won’t be on the payroll of any of your clients, so you’ll need to have alternative arrangements in place.

The three main options are to set up your own Limited company, go self-employed or work through an Umbrella company.

Self-employed is outside the scope of this guide – but briefly, it involves working entirely for yourself. You invoice under your own name or a trading name and account for all tax at the standard personal income tax rates. It’s a less popular approach in most professions as you don’t benefit from the preferential tax rates from operating a Limited company, and a company structure also protects your personal assets from losses, costs or legal claims.

 

What is a Limited company?

Limited company is a separate legal entity through which you conduct your business as director and shareholder. Since it’s a separate legal entity to yourself, the company has its own bank account and assets. Contracts are between your business and your client, and any profits and losses belong to the company.

The name Limited company stems from the concept of limited liability – meaning that the owner of the company cannot be held personally liable for any losses or debts incurred by the business. If things go wrong, creditors can make claims on the assets of the business, but your own personal assets are protected.

There is a small fee associated with setting up a Limited company and registering it at Companies House, as well as several reporting requirements. Accounts must be submitted annually, alongside other administrative documents. There are also deadlines for paying Corporation Tax, currently charged at 20% of the company’s profits after all expenses are taken into account.

What is an Umbrella company?

An Umbrella company acts as an employer for contractors on temporary contracts, typically working through a recruitment agency. It serves as a single employer throughout multiple contracts – contracts are between your clients and the Umbrella company, which pays you as an employee through the PAYE system.

As contractors sign a full contract of employment with an Umbrella company, they’re entitled to the full statutory benefits of employment – Statutory Maternity and Paternity Pay (SMP/SPP), Statutory Sick Pay (SSP), a pension scheme and holiday pay. Many Umbrella companies also offer additional employment benefits not required by law, such as insurance, private medical cover, access to counselling and welfare services, and reward & benefits packages.

Since Umbrella company employees are paid through the PAYE system, there are no additional reporting requirements – just like a permanent employee, all tax is deducted at source and declared to HMRC each time you’re paid.

When would a Limited company be suitable?

A Limited company is the most tax-efficient structure through which to conduct your business. You can pay yourself a combination of salary and dividends to benefit from the different tax-free allowances available for each, make tax-free pension contributions through the company and even leave funds in the business to extract in future years.

Although it’s the most tax-efficient vehicle through which to be paid, a Limited company does come with a higher administrative burden than an Umbrella company. The best contractor accountants will be able to take some of this load off your hands, but you’ll still need to keep track of your income and expenses, including receipts and invoices, and provide the information required for the submission of your year-end accounts and tax return. This isn’t an enormous hardship, but worth being aware of if you’re the type of person who prefers to get on with their work with zero distractions!

 

The tax benefits of a Limited company disappear if you fall within legislation called the Intermediaries Legislation – commonly known as IR35 (see our introductory guide to IR35 here). If your working arrangements put you on the wrong side of IR35, you’ll pay tax and National Insurance at the same rate as a normal employee, despite the Limited company structure. If this is the case.

 

 

When would an Umbrella company be suitable?

 Being paid through an Umbrella company is the lowest-admin option – the Umbrella company will invoice your client for your work on an agreed timescale (usually weekly), and process your payment through the PAYE system, accounting for tax and National Insurance. They’ll also take a margin each time you’re paid. You may need to submit a weekly timesheet, but that’s the extent of the work you’ll have to put in to be paid.

 

Umbrella companies are also suitable if you’re working on a short-term contract, or unsure if you’ll continue contracting long-term. Unlike a Limited company, which needs to be closed down if it’s no longer needed, you can simply end your employment with an Umbrella company if you no longer require their services. As with the end of all employment relationships, you’ll be issued with a P45 which you can take to your next employer.

 

Which is best for me?

If you choose to work through MSR Group, you don’t need to choose! If you set up a Limited company through us, we’ll allow you to switch between the company and Umbrella employment at will, without any additional fees and with all administration taken care of. It may be that one contract is more suitable to be paid through the company, but the next falls within IR35 and therefore it’d be preferable to be paid through the Umbrella company.