Limited Company or Umbrella Company – which is right for you?

TaxAgility Accountants London - Limited or UmbrellaIf you are considering starting contracting, one of the first decisions you need to make is whether to set up your company as a Limited Company or Umbrella Company.

To make this decision, you first need to know what a Limited Company is and how this is different to an Umbrella Company; and most importantly which structure will best suit your circumstances and maximise your take home pay.

So, what are the differences and how much could you save?

What is a Limited Company?

Trading through a Limited Company has become much more popular recently due to the flexibility, security and tax efficiency the structure provides. A Limited Company has a separate legal entity from the owners of the company, even if you own 100% of the shares. You as a shareholder in the company will have ‘limited liability’, as your personal finances are separate from the company’s finances.

One of the key advantages of operating through a Limited Company is that profits made by the company are withdrawn by shareholders as dividends; and unlike a salary, dividends are not subject to National Insurance Contributions. This factor alone can make the tax savings significant.

The major disadvantage of running your own Limited Company is the ongoing administration and legalities such as invoicing clients, managing monthly payroll and various annual returns. For this reason, the majority of contractors choose to outsource this administration to a qualified accountant.

For more information, please see our detailed explanation under Limited Companies.

What is an Umbrella Company?

By joining an Umbrella Company, you will become an employee of the Umbrella Company and will submit timesheets and expenses to them. They will generate and send an invoice to your client, follow-up on payment and calculate your tax and any NI due. The Umbrella Company will manage all the administration for a monthly fee and then pay you the net amount, direct to your bank account.

The advantage of working through an Umbrella Company is that they will manage all the administration, therefore you avoid the duties and paperwork associated with running a Limited Company.

However, the major disadvantage is that your salary is subject to full PAYE tax and National Insurance contributions as you are essentially treated as a ‘permanent employee’ in the Umbrella Company.

For more information, please see our explanation under Umbrella Companies.

How much can you save?

When working through an Umbrella Company, you can take home approximately 60 to 65% of your total contract earnings.

When working through a Limited Company, you will typically be taking home between 75 to 80% of your total contract earnings.

The major difference is due to the NI savings and tax structuring opportunities available through a Limited Company. You are also able to claim for a wider range of expenses, thereby increasing your take-home pay. A Limited Company structure is generally well suited to contractors, as it is the most tax efficient method to maximise your take-home pay, assuming the contractor is outside IR35.

So, Limited Company or Umbrella Company – which is right for you?

This all depends on your circumstances, but as a general rule, if you are new to contracting or are only planning on a one-off short term contract (less than twelve weeks), then an Umbrella Company is a simple way to enter the contracting market. Just be sure to review the terms carefully as the fees charged by Umbrella Companies vary dramatically and can be considerable.

If you are planning on contracting as a longer term arrangement, then a Limited Company will allow you to maximise your take-home pay, provide flexibility and the best possible returns. We can assist you with the initial set-up and ongoing management of your Limited Company for a competitive set monthly fee.  Our fixed fee packages start from as little as £90 + vat per month, with no hidden charges.

In either case, if you are looking to set up a Limited Company or join an Umbrella Company we would always recommend that you speak to a qualified accountant first, to determine which structure is right for your individual circumstances.
If you are already a contractor and looking to restructure and maximise your take-home pay or are just starting out and would like to find out more information, please feel free to send an enquiry or call us on 020 8780 2349 today to arrange a complimentary no obligation meeting.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstances.