Umbrella Company vs Limited Company

Running your accounts through an umbrella or limited company can offer you many benefits as a contractor. Before you choose your structure, you should first get to know the differences between both in order to make an informed decision.

What is an umbrella payroll company?

An umbrella company acts as an employer to contractors. It’s an easy option for first time contractors or freelancers. If you aren’t sure if contracting is for you, or if you think that you may go back to permanent employment at a later stage, then an umbrella company might be your best bet.

Advantages

  • Less administration as the umbrella company handles this.
  • Your PAYE and NI is calculated for you and deducted before receiving your salary. This means you won’t be responsible for actually paying these taxes because the umbrella company handles this for you.
  • You receive the same benefits as someone permanently employed.
  • All you have to do is submit time sheets and wait to be paid. Only when your umbrella company processes payments, do you pay for the service.

Disadvantages

  • Due to the fact that you’re treated as an employee by the umbrella company, your salary will be subject to full PAYE tax and NI.
  • You have to rely on the umbrella company to process and invoice correctly, and on time.
  • It won’t support your future plans should you want to start your own business and build on it, because at the end of the day, you’re essentially an employer of the umbrella company.
  • If you earn revenue outside IR35, there might be a higher tax burden than when using a limited company.

What is a limited company?

This is a business structure that offers you, the shareholders, and the directors of the company many advantages. Because your personal finances are kept separate from the company’s, your personal liability is limited. This means you’re protected if anything happens to the company.

Advantages

  • Having a limited company portrays a professional image.
  • By virtue of owning a limited company, you can run your own business and have full control over your finances.
  • You can claim back on a wider range of expenses than when using an umbrella company.
  • Good opportunity for tax planning.

Disadvantages

  • You need to take care of any administration involved.
  • You need to spend a fair amount of time on your accounting affairs, or appoint an accountant to do this for you.
  • If you contract for a short period of time and decide to go back to permanent employment shortly after, it can cost you a lot because there will be costs to close down your limited company.
  • People, including your competitors, are able to see your accounts and other information you need to file at Companies House.

*This article was provided by 1st Contact Accounting, who gives forward-thinking individuals the tools to steer their financial affairs forward.




Comments [1]

  • Anonymous says:

    Limited is the way to go if you have been contracting for a while, but if you are not sure and are new to the contracting world, an Umbrella Company will have you setup in no time to start earning.

    Exactly, nice article.

    Without umbrella companies, many construction firms would be in trouble and they are vital for the growth of the economy.

    http://umbrellapayrollcompany.co.uk/


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