Limited vs umbrella: which option should you choose?

Contracting through a limited company has many benefits, with the most obvious being the tax advantages for those who are outside IR35. However, using an umbrella company has its advantages too! We’re going to investigate both options so that we can help you decide which one is best for your circumstances – limited or umbrella?

Advantages of a limited company

When you set up a limited company, it becomes a separate legal entity and your company’s liabilities and assets are kept separate from your personal finances. This means that you are only liable for as much as you put into the business, and your assets are always protected should the company come into financial difficulties.

A limited company is the most tax-efficient way to operate as you can pay yourself a combination of salary and dividends and can benefit from a host of tax-free allowances – provided your contracts do not fall inside IR35.

As a director of your own limited company, you have greater flexibility and control over your business decisions, and you will be responsible for all aspects of the company’s administration. This includes invoicing, calculating and paying taxes to HMRC and drawing your salary from the company in a responsible manner. If you prefer a more hands-off approach, a contractor accountant will be able to support you with these administrative tasks and provide tailored tax planning and advice.

Advantages of an umbrella company

One of the main advantages of working via an umbrella company is how easy it is to use. Umbrella companies will take on the majority of the administrative tasks from invoicing your client or recruitment agency to processing your pay – the only ongoing task you will have is to submit a weekly/monthly timesheet. And, you can be set up and ready to start contracting in a matter of minutes which is beneficial if you accept a last-minute assignment and are on a short timescale.

One of the main disadvantages of working through an umbrella company is that unlike a limited company, you cannot choose your payment structure (depending on your IR35 status). You are paid via PAYE, and all income is subject to tax and NICs. However, all the taxes are deducted before the umbrella company pays you, so provided this is the only income you receive, you can rest assured that you have no further taxes to pay. On the flip side – at least you don’t need to worry about your IR35 status, because it’s irrelevant when using an umbrella because you’re paid like a permanent employee.

When you register with an umbrella company, you become an employee of theirs and will be taxed as such. This means you can take on multiple assignments alongside each other with different clients, and your tax code will not be negatively affected. You will also benefit from a full payslip history which details your earnings and the amount of tax you have paid.

Finally, as you sign a contract of employment with the umbrella company, you are entitled to statutory benefits such as Sick Pay and Maternity/Paternity Pay.

Are you better suited to a limited company or an umbrella company?

The short answer is, this will entirely depend on your circumstances and the contracts you take on. If you are confident that you can continue to operate outside IR35 past April 2021, then a limited company may be a more tax-efficient option for you. If your contracts are likely to fall inside IR35, or you prefer a more hands-off approach to contracting, an umbrella company is probably the best option for you.

The importance of using an accredited provider

Regardless of whether you choose to set up your own limited company or operate through an umbrella company, we must stress how important it is that you use a compliant provider. Using an FCSA accredited contractor accountant or umbrella company will give you complete peace of mind that you are operating in compliance with HMRC regulations, and you will never fall foul of UK tax law.

If you are looking for a reputable provider, why not take a look at our top 10 umbrella companies. There is absolutely no obligation to use their services and it is a great way to chat with some industry experts about your payroll options.

Click here to see our top 10 umbrella companies!

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