Umbrella Company UK
Umbrella Company vs Limited Company
The biggest question is either to work as a contractor, freelancer, or consultant. The most popular choices are either through your limited company or an employee through an umbrella company. Both the options have their advantages and disadvantages. To get you started, let’s first understand what it means. The biggest question is either to work as a contractor, freelancer, or consultant. The most popular choices are either through your limited company or an employee through an umbrella company. Both the options have their advantages and disadvantages. To get you started, let’s first understand what it means.
Under the umbrella solution, you become an employee of the umbrella company and are paid through PAYE. You are required to submit timesheets and expense details weekly or monthly to the umbrella company. The umbrella company will then generate an invoice for the end client or the agency and pay you a salary after deducting income tax, national insurance, and their margin for the services.
This solution is ideal for contractors and freelancers starting or planning to work on shorter assignments. It involves less paperwork as the umbrella company takes care of the administration hassle as they employ you.
A limited company is a service company you can incorporate to run your business. To incorporate, you must register the company with Companies House, register for various taxes with HMRC, set up a business bank account, and organize insurance cover. The limited company has statutory and financial obligations and is a separate legal entity from you. As a limited company director, you will be responsible for submitting all the relevant tax and business documents to HMRC and Companies House.
The limited company requires added commitment because of the statutory responsibilities. It is suitable for contractors and freelancers who have contracts for more than six months and earn at least £15 per hour.
Compare your take home pay
The limited company gives you a Professional status and the ability to create your own Contracting brand.
It is the most expensive way to operate as your entire income is subject to Tax and NI like a permanent employee.
The umbrella Company charges a margin to process a payroll.
Depending on the umbrella company is huge as they are responsible for collecting money you earn and then paying them.
There is less privacy as most limited companies have your personal information.
You, as a Director, are responsible for filing annual returns and accounts, invoices also higher administrative responsibilities.
As there are increased statutory responsibilities, the accountancy fee may be higher, and the penalties for not complying with the obligations can be high.
Can it be done by changing from a limited company to an umbrella company?
Yes – with recent changes to IR35 rules, many contractors need to switch from operating as a limited company to working with a PAYE umbrella company. Yes, you can, of course, do this – and you can even maintain your limited company for the duration so you can continue working through a Limited Company in future. However, you will need to avoid any trading as this limited company for the duration of your work with the umbrella company.