Comparing limited vs Umbrella

There are advantages and disadvantages with each option, so you’ll need to carefully consider the implications of each before you decide what’s best for you. Our expert team of contractor accountants is on hand to help you.

When comparing limited with Umbrella contracting, the right choice will depend upon a number of factors, including:

  • Your personal circumstances including your anticipated pay rate.

A limited company is usually the most tax efficient way for contractors to work, generally resulting in a higher take-home pay. When using an Umbrella company, you’ll be taxed like an employee which means you’re likely to have less take-home pay, though there are other benefits to Umbrella employment which you should take into account.

  • How much responsibility you want to take and the level of risk you are comfortable with.

Running a limited company means you’ll need to take responsibility as a company director, submitting annual accounts to Companies House and paying tax to HMRC. This entails keeping your records in order throughout the year to ensure compliance. If you are planning to work as a contractor for the medium to long-term, then a limited company may be a good option.

Conversely, working as an Umbrella employee is much simpler in that you only need to submit a weekly timesheet. Your Umbrella company will invoice your client and then pay you once all statutory deductions have been made (income tax, National Insurance etc). If you are planning to work as a contractor for the short/medium-term then an Umbrella company may be the simplest option. You can still switch seamlessly between contracts when using an Umbrella company.

  • What set-up costs you’re willing to incur and the administrative burden you wish to accept.

There are set-up costs associated with setting up and running a limited company. Most limited companies require the support of chartered accountants to submit annual accounts to HMRC and annual reports to Companies House. There are penalties for late submission, so you’ll need to be comfortable with keeping on top of the administration associated with running a limited company.

  • Whether the contract you’re undertaking involves you working under Supervision, Direction or Control (SDC) or falls inside or outside IR35 – both will fundamentally affect your tax position.

Whether you are subject to SDC largely depends on the manner in which your work will be carried out i.e. will you or your work be subject to supervision, direction or control or does someone have a right to exercise SDC over how you do the work.

IR35 is also known as ‘intermediaries’ legislation’. It’s a set of rules that affect your tax and National Insurance if you’re contracted to work for a client through an intermediary (a PSC is classified as an intermediary). If HMRC believe that you are working ‘within IR35’ then the intermediary has to deduct PAYE and NICs on the payments it makes to you.

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