Umbrella Company v Limited Company

Although working through an Umbrella Company and running your own Limited Company are both payment solutions from a Contractors perspective, there are a number of significant differences between the two options.

Umbrella Companies
Working through an Umbrella Company offers a straight forward full employment solution, which allows you to claim a number of business related expenses, thereby reducing your tax bill.

Because an Umbrella Company provides all of the administration, it is one of the simplest ways to work, and you have no worries about IR35 or MSC legislation as these do not apply to Umbrella Companies. You will generally have no additional costs for insurance and accountancy services as the fees the Umbrella Company charges should be fully inclusive of these. In many instances you won’t even have to complete an annual self assessment tax return.

That said, as working through an Umbrella Company means that you will be paid through the PAYE system, you will generally receive less money in your pocket than if you run your own Limited Company, although this depends to a large extent on how much you earn and whether you are able work outside of IR35.

Limited Company
Running your own Limited Company, means that you will be running your own business, this could be the right choice if you are a higher earner or have multiple income streams. You are also likely to receive higher net returns after the deduction of taxes.

The responsibilities and paperwork however, mean you are not always free to get on with working! A limited company generally means the following:

You will be a director of your own company and you must keep Companies House informed of your Company’s dealings
You will need to pay for the services of an accountant to prepare you accounts and tax returns
You must keep proper records of accounts, invoicing and VAT records
You will be responsible for submitting accurate corporation tax returns and payments
You will be responsible for conducting regular IR35 reviews to ensure you are on the correct side of tax law
You will be required to deal promptly with enquiries from your accountant, HMRC and Companies House etc.
You will be responsible for raising invoices to clients for your services
You will need to run a company bank account
You must ensure that all documents and returns are filed in good time to avoid late filing penalties
You will be required to complete an annual self assessment tax return to declare any dividends received to the HMRC and pay any extra tax liabilities due on these dividends each year.

The increased responsibility and workload of running a Limited Company, is tempered with the ability to increase the amount of money you make from providing your services, through receiving Dividends in place of full PAYE salary and the potential of taking advantage of the Flat Rate VAT scheme.

As with all business decisions, we would always advise you to take professional advice before deciding which route to follow.

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