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  • Writer's pictureUmbrella Search

Umbrella company vs. self-employed: what’s the difference?

Updated: Feb 8, 2023

Suppose you are considering contracting through an umbrella company. In that case, you will need to understand how one works and whether umbrella company contracting is the same as being self-employed. After all, there are several different options in the world of contracting, which can make things confusing to contractors.


To help, Umbrella Search explains how an umbrella company works and whether it is the same as being self-employed, so you know whether this is the right option.


What is an umbrella company?


One way that contractors can operate is through an umbrella company.


An umbrella company puts the contractor on its payroll. It pays their salary, deducting correct tax and National Insurance levels from the amount before it is paid to the contractor. To do this, the umbrella company invoices the client on the contractor’s behalf, meaning there is no need for the contractor to do this themselves.


The umbrella company also takes on a range of other tasks on the contractors’ behalf, including:


  • Ensuring the contractor is covered with the correct and required insurance needed to carry out the contract at hand

  • Processing business expenses incurred by the contractor and offsetting these against the contractor’s tax bill

  • Completing necessary paperwork and admin required

  • Providing the contractor with the statutory payments they are entitled to. These include holiday pay, sick pay, a workplace pension, and maternity and paternity pay. Read more about statutory payments for contractors in our handy guide.


That’s how an umbrella company works, so is an umbrella company contracting the same as a self-employed?


Umbrella company vs. self-employed


The answer to whether an umbrella company is the same as a self-employed one is no.


This is because an umbrella company employs a contractor, meaning an umbrella company is an employee and not self-employed.


By employing the contractor, the umbrella company can provide a range of employee benefits, including putting the contractor on their payroll and providing the contractor with statutory benefits.

Self-employed contractors, on the other hand, do not receive these benefits.


Next, we will look at self-employed contractors and how they operate.


What is a limited company contractor?


Unlike an umbrella company contractor, an employee of their chosen provider, a self-employed contractor is not employed and must operate differently.


Self-employed contractors must usually set up and operate through their own limited

company.


There are several critical differences between an umbrella company vs. limited company.



Umbrella company vs. limited company


1. How the contractor pays tax


The first main difference is the way that the contractor pays their tax.


Unlike an umbrella company contractor put on the company’s payroll and therefore pays tax through the PAYE system, limited company contractors have to pay through self-assessment.


The contractor will invoice the client for their fee. Once the fee has been paid, they must set aside enough to cover their tax and National Insurance bill. Tax is paid annually through self-assessment, meaning that the contractor has to declare how much they have received in income and then pay the tax owed.


Self-assessment can often be time-consuming and complex, meaning many limited company contractors usually take on the services of an accountant to help them out.


This also requires strong organisation and planning to set aside enough money to cover the tax bill at the end of the financial year.


2. How the contractor operates


Another critical difference between an umbrella company vs. limited company is how the contractor operates.


An umbrella company takes care of the business and finance side of contracting for the contractor. For this reason, umbrella contractors merely have to concentrate on the contract at hand and don’t have to worry about running a business. That’s why many move to an umbrella company, which is considered an easy way to work.


Limited company contractors, on the other hand, must focus on setting up and running their own limited company.


This requires the self-employed contractor to take on various tasks associated with running a business, including paperwork, admin, invoicing, processing expenses, and acquiring insurance and finances. This can take up much of the self-employed contractor’s time and energy and leaves them with less time to focus on the contract.


3. Statutory benefits


A final key difference between an umbrella company vs. limited company is statutory payments.


We have already mentioned that umbrella company contractors receive statutory benefits from their chosen provider. This is because they are employed by the company and receive the same benefits as all UK employees.


On the other hand, self-employed contractors are not employees and therefore do not receive such benefits.


Therefore, if a self-employed contractor wishes to take a holiday or becomes too ill to work, they will only receive payment when they are working. Likewise, these contractors do not receive a workplace pension as they do not have an employer, meaning they must ensure that they pay into a private pension.


After looking at the differences between an umbrella company vs. limited company, if you have decided that an umbrella company best suits your contracting needs, Umbrella Search can help with the next steps.


Find the best umbrella company for you with Umbrella Search.


Umbrella Search makes it quick and easy for contractors to find the best umbrella company for them.


We understand how finding the right umbrella company can be tricky and time-consuming for the busy contractor, which is why we’re here to make things easy. Moreover, we only recommend the best umbrella providers out there, so you can rest assured you’re making the best decision. To see how we can help you, get in touch for a quote today, and one of our friendly team members will get back to you.



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