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Umbrella company vs limited company: what’s the difference?


Every contractor must decide between umbrella company vs limited company during their career. 


What you choose can have a significant impact on your day-to-day life, so it's not a decision that should be taken lightly. 


To help make the choice that little bit easier, in this guide Umbrella Search outline the key differences between umbrella company and limited company, so you can make a decision that's right for you. 


What is a limited company?


Let's start by taking a look at a limited company. What exactly is one and how does it work when contracting?


A limited company is a company registered with Companies House.


When you set up a limited company, you will be appointed as the company director, of which you can have several. As a company director, you must take care of several aspects of admin and finances, as well as adhere to a set of director's duties which you can find out more about here.


 Some of the tasks you must undertake include filing an annual confirmation statement, keeping company accounts up to date, filing annual company accounts and a corporation tax return, paying tax on any company profits made.


A limited company offers one way that a contractor can operate. By setting up their own limited company, contractors can work with the client through this company on a self-employed basis.


What is an umbrella company?


That's what a limited company is, now lets take a look at what an umbrella company is. 


Rather than setting up your own company and being self-employed, when you choose to engage the services of an umbrella company, you will become an employee of the chosen provider.


This means that the umbrella company takes care of all aspects of tax and pays you a salary whether that's monthly, fortnightly or weekly. 


In fact, the umbrella company will liaise directly with the client, meaning little work to do on your end. 


Umbrella company vs limited company: which is best?


Now we know the difference between an umbrella company and a limited company, let's look in more detail about how that impacts the contractor, to help you decide which is best for you. 


Tax and finances


As we have mentioned, when operating through a limited company, the contractor is solely responsible for finances and tax, from invoicing and getting paid by the client, to submitting not only a self-assessment for their income tax, but also company accounts. 


Tax returns can be complex and time-consuming, which leads most limited company contractors to employ the services of an accountant, which comes at a cost. Even with the help of an accountant, the limited company contractor must stay on top of their finances and undertake day-to-day bookkeeping, which can take time and energy.


Tax and finances are much easier through an umbrella company, however. This is due to the fact that the umbrella company takes care of everything from invoicing the client to deducting the correct levels of tax from the contractor's pay. This means no tricky tax returns and that you can rest assured that your tax affairs are always up to date. 



What is an umbrella company?

Statutory benefits


Another consideration when making your decision is statutory rights, which covers holiday leave, sick pay and maternity and paternity leave.


As an umbrella company contractor is employed, they are automatically entitled to all these statutory rights, which means a minimum of 5.6 weeks paid holiday leave, sick pay if you are too ill to carry out the contract at hand, and maternity/paternity leave where applicable.


Contractors that work through a limited company are not employees, and so don't benefit from statutory rights. This means they won't be paid when they take time off whether it's for a well-earned break or illness. 


Insurance


Every contractor must have certain types of insurance, including professional indemnity insurance and public liability insurance to protect them should anything go wrong. Some contractors may need more than basic cover, depending on the contract they are working on. 


An umbrella company will ensure that the contractor is covered with the minimum requirements when it comes to insurance.


A contractor working through a limited company, however, must take on this task alone, not only meaning an additional cost, but also additional time taken to research and find the best policies for their needs. 


IR35


Another major consideration when it comes to deciding between umbrella company and limited company is IR35. 


Whether you are inside or outside IR35 can be complex, and getting caught out can lead to stressful and expensive investigations.


Thankfully, for umbrella company contractors, IR35 is not an issue, due to the fact that they are employees and therefore automatically exempt. 


Unfortunately the same can't be said for limited company contractors, who must make efforts to ensure they are IR35 compliant.


Ready to make your decision?


Having read about the differences between an umbrella company and a limited company, you may have decided that the benefits of an umbrella company outweigh those of a limited company.


After all, with an umbrella company, you will get hassle-free contracting, don't have to worry about finances or taxes, can forget about IR35, and will receive statutory benefits, meaning if you need to take time off, you will still be paid. 

If you would like help to find an umbrella company that's the best fit for you, we are here to help. 


Our team will carry out the hard work and research to find an umbrella company that works to your needs. With plenty of umbrella companies out there it can be difficult to know which is the best one to pick, but we're here to do the hard work for you. 



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