Umbrella vs. Limited Company

When you’re just stepping into self-employment, one of the first things you must do is decide which working structure is right for you. While there is a range of options to consider, the two most popular models are Umbrella employment or setting up your own Limited Company. There are advantages and disadvantages with both options, but the right choice for you will depend upon your preferences, personal circumstances, and IR35 status.

Here, we outline the differences between Limited Company and Umbrella Employment and highlight five things you should consider before deciding which working option will suit you best.

Limited Company

What is it?
A limited company is its own legal entity, separate from its shareholders and directors (even if you are just one person acting as both shareholder and director). Your company will have a separate bank account, its own income and expenditure, can enter into its own contracts, and has to pay its own taxes.

How does payment work?
As a limited company, you pay Corporation Tax on your profits rather than Income Tax and you can pay yourself through a combination of salary and dividends. So it tends to be the most lucrative and profitable way to work.

You are also able to claim a wide range of business expenses through your PSC, including equipment, mileage, business trips etc.

Umbrella Employment

What is it?
Umbrella contracting is a great way to enjoy the freedom and flexibility of contracting while still maintaining access to a wide range of employment rights, protections, and benefits.

It is often the first step contractors take on their contracting journey when they’re not quite ready to start their own limited company or if an assignment is classed as ‘inside’ IR35.

When you join an Umbrella, you become their employee and receive employment benefits whilst retaining the ability to work as a contractor.

How does payment work?
The Umbrella company will engage contractually with the end client or recruitment agency it is supplying you into and will invoice the client or agency for its services (supplying its employee). From this fee, the Umbrella accounts for its costs and retains a profit margin before paying a salary to you, which is subject to income tax and national insurance.

For a payment illustration, use our Umbrella take-home pay calculator.

Well, how do I choose?

Determining which company structure is right for you is a very personal decision that may change over time as your career evolves. If you’re confused about which working structure is right for you, don’t hesitate to get in touch with our friendly advisers who will be able to provide you with tailored advice on which option is right for you. In the meantime, here are some factors to consider before making your choice:

How much responsibility are you willing to take?
Running a limited company entails a level of administration and you’ll have the responsibility of meeting your obligations as a Company Director. You’ll need to prepare annual accounts and make submissions to HMRC and Companies House as well as ensure you pay the correct taxes. This isn’t usually onerous, particularly with the support of specialist contractor accountants like those at Workwell, but it’s not for everyone. If you don’t want this responsibility, then it may be that you are more suited to Umbrella working.

Do you want access to a company pension?
If you join an Umbrella company you’ll be entitled to the same rights as any other employee, including access to a company pension scheme. If you set up your own limited company you will need to make your own pension arrangements. We work with a range of specialist partners and financial advisers who can help you make these arrangements if necessary.

Are you ‘caught’ by IR35?
IR35 is legislation that seeks to ensure self-employed individuals pay the correct amount of tax. There are strict criteria that dictate whether IR35 applies to a specific contract. If your role is ‘caught’ by IR35 then it may prove difficult to work through your limited company compliantly. If this is the case, then an Umbrella company is likely to be the best alternative solution for you or you may wish to check out our IR35 Switch solution which offers enhanced flexibility.

Click here to read more about IR35 and how it applies to you

Are you happy to invoice your clients and chase payments?
If you set up a limited company for contracting, you’ll be responsible for invoicing your clients, tracking payments, and chasing any outstanding invoices. If you work for an Umbrella, on the other hand, you simply submit your timesheet to receive payment. The Umbrella company is responsible for invoicing your client or recruitment agency and deducting Income Tax and National Insurance directly from your pay, so you can rest assured knowing that your taxes are correctly calculated and paid.

Are employee benefits important to you?
As an Umbrella employee, you are entitled to holiday pay, sick pay, maternity/paternity and adoption leave among other benefits. As a limited company contractor, you will not have these benefits, so you will need to make arrangements to cover any income you may miss out on when taking a holiday or extended leave. Again, this will need forethought and consideration before you decide whether a limited company is right for you.

An additional benefit of working through an Umbrella company is that you will build a record of continuous employment. This is helpful if you are likely to need to apply for a mortgage or other type of loan.