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How to choose between Umbrella or Limited in 2023

Updated: Feb 3, 2023

Whether a contractor chooses an umbrella company or a limited company will significantly impact their career and day-to-day life.

If you are weighing up your options between Umbrella or limited, Umbrella Search is here to help.

We have put together this guide outlining the key differences between Umbrella vs. limited companies to help every contractor make the best decision for them.

Umbrella vs. limited company: what's the difference?

Let's start by looking at how Umbrella and limited companies differ.

There are several key differences between each. However, the main difference is whether the contractor is employed or self-employed. After all, this sets each option apart and leads to a range of crucial differences between both.

With an umbrella company, the contractor becomes the company’s employee. However, with the limited company route, the contractor is self-employed.

This impacts several aspects of the contractor's daily life, including how they pay their taxes, additional time and effort required, whether the contractor will receive statutory benefits, and whether the contractor is at risk of getting caught by IR35.

These are all crucial considerations that contractors should consider when considering whether an umbrella or limited company is the best option.

Next, we will look at each difference in more detail to help you explore the suitable option.

Paying taxes: PAYE vs. self-assessment

As we have mentioned, the first key difference between Umbrella and a limited company is how contractors will pay taxes through each.

As they are employees or providers, umbrella company contractors will be put on the company's payroll. They will therefore pay taxes through the PAYE tax system.

The PAYE system is how most UK workers pay their taxes, which stands for pay as you earn. This means that the contractor pays the correct levels of taxation according to their salary, meaning they are always up to date with their tax and National Insurance obligations.

The contractor inputs their timesheet to the umbrella company, which will bill the client for the correct number of hours. The umbrella company will collect the fee and process it through the payroll before paying the contractor the right amount.

This means that the contractor gets paid, and the umbrella company manages the contractor's tax affairs, meaning no additional work or effort is required.

On the other hand, a limited company contractor is responsible for dealing with their tax obligations. Rather than working on the payroll like umbrella company contractors, they work off-payroll and must pay taxes through self-assessment.

The limited company contractor is paid their fee directly. They must set aside a sufficient amount to cover their tax and National Insurance bill.

They must then file for self-assessment after they have been paid. This can be hard work, meaning many limited company contractors opt to use the services of an accountant to help out.

How much time is required?

The next difference between Umbrella and vs. limited company is how much effort and time the contractor must invest.

After all, umbrella companies are widely renowned for making contracting easy and hassle-free. This is because the umbrella company takes care of many tricky and time-consuming tasks, which include admin, paperwork, taxes, finances, insurance, and statutory payments.

On the other hand, a limited company contractor must deal with all these things themselves.

The limited company contractor not only has to focus on the contract at hand but must also deal with the responsibilities of running a business and take the time to do this.

For this reason, when deciding between Umbrella and vs. limited company, the importance you place on your work-to-life balance must be accounted for.

Who receives statutory benefits?

Another widely recognised benefit of operating through an Umbrella company is that these contractors receive statutory benefits, including statutory sick pay, statutory holiday leave, maternity and paternity leave, and a workplace pension.

Limited company contractors, however, are not entitled to statutory payments. This is because they are not employees.

Therefore, if you wish to be covered by the safety net of statutory pay should you be too ill to work or even merely want to take a break. An umbrella company could be the better option for you.

Getting caught by IR35

The final difference between Umbrella and a limited company is IR35.

Every contractor will have heard of IR35, as it is a source of much stress to many.

However, for contractors that wish to avoid getting caught out by the dreaded IR35 legislation, an umbrella company could be the best option.

This is because the contractor is an umbrella company employee, making them exempt from IR35.

IR35 is something that limited company contractors must take into consideration when carrying out their contract work. Limited company contractors must ensure that they are IR35 compliant to avoid timely and costly investigations.

If an umbrella company is your choice, let Umbrella Search help.

Now you know the main differences between Umbrella and a limited company. If you have decided that an umbrella company is the correct route, Umbrella Search can help you find an umbrella company that perfectly fits your needs.

Head over to our website, input your details, and our team of friendly professionals will take care of the rest. To take the first steps in finding the best umbrella company, why not give it a go yourself today?


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