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Limited Companies vs. Umbrella Companies

You’re looking for a career change and have decided to work for yourself and become a contractor. However, you’re not sure of the benefits or whether you should set up as a limited company or with umbrella company.

There are many benefits to becoming a contractor. You have more freedom and flexibility when it comes to your hours as well as many financial benefits. All this freedom does not come without added responsibility. Unfortunately, contracting also comes with a great deal of decisions. As a contractor, there are a few options as to how you want to run your business. However, understanding the best course of action can be confusing. Before making the decision, it is important that you understand the different options and all they entail. It is also important to take notice of the new IR35 legislation and how it affects contractors.

Limited Company

The first option for a contractor is setting up a limited company as it means that your personal finances will be separate from your company finances. This is good news for you as your personal finances will not be affected by anything that happens with the limited company making a limited company the most tax efficient option. It is important to note that with a limited company, you usually end up taking home between 75 to 80% of your total earnings.

However, it is important to understand that setting up a limited company means that you will be responsible for administrative and legal obligations for the company. You will be responsible for invoices and payrolls. This can be extremely time consuming and take away valuable time you could spend on your business. Read more for information about the inner workings of Limited Companies here.

Umbrella Company

The second option is to set up an umbrella company which lifts the burden of all the administrative responsibilities off your shoulders. An umbrella company will handle all the administrative details so you can focus on your business. All you have to do is submit time sheets and expenses, something our accountants can help you with. This will save you a lot of time and stress that sometimes comes with a limited company.

While you won’t have to deal with any administrative duties, you will have to pay a monthly fee to the umbrella company. This means that instead of taking home 75 to 80% of your total earnings, you will only take 60 to 65% of them. This can add up when it comes to long term contracting. You can read our page on Umbrella Companies for more details.

Which Should You Choose?

We believe there is no ‘one size fits all’ when it comes to choosing between a limited and an umbrella company. The answer widely depends on your goals as a contractor and we understand that everyone has different business goals. If you will only be contracting for a short amount of time, it might be more beneficial to set up an Umbrella Company. For long term contracting, a limited company may be the best option to maximise your profits. However, short term versus long term contracting are only two variables that go into the decision. At Tax Agility, we can look at your business to help you determine the best course of action for you personally. It is important to chose the option that brings the greatest benefits to you, and we can help you do that.

Making serious decisions such as this can be difficult. Call us on 020 8780 2349 to arrange a meeting with us so we can discuss which option is best for you.