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  • Writer's pictureUmbrella Search

Umbrella vs. limited company: what's best for me?

Updated: Feb 3, 2023

Every contractor must decide between an umbrella company and vs. limited company.


These two very different paths will impact how the contractor operates, how they will be paid, how they pay their taxes and their day-to-day lives as a contractor.


To help make the decision easier, this guide, Umbrella Search, explains the critical differences between umbrella companies vs. limited companies, outlining how each option works and the benefits and drawbacks of each.


Option 1: umbrella company


We’ll first start by looking at an umbrella company and how they work.


An umbrella company employs the contractor. So, rather than the contractor working through their own limited company on a self-employed basis, they will be an employee of their chosen umbrella company. However, they still maintain the freedom to source and choose which contracts they want to work on.


The umbrella company invoices the client, ensures invoices are paid on time and completes other business tasks such as paperwork and admin.


The umbrella company will collect the contractor's fee from the client and deduct the correct tax and National Insurance levels from it before paying the contractor.


As an umbrella company employee, the contractor also receives statutory benefits, including holiday, sick, maternity/paternity pay, and a workplace pension.


What are the benefits of an umbrella company?


That's how an umbrella company works, so what are the main advantages of operating this way for contractors?


Hassle-free, easy contracting


One of the main benefits of an umbrella company is that they make contracting stress-free and easy.


After all, the umbrella company takes care of the financial and business side of contracting, leaving the contractor to get on with the work at hand.


Statutory benefits


As we have mentioned, umbrella contractors qualify for statutory benefits. When you take a holiday, are sick, or require maternity or paternity leave, the company will cover the costs and don't have to be paid out of your pocket.


Tax is taken care of


What’s more, tax and National Insurance contributions and calculated and paid to HMRC by the umbrella company, meaning there's no need to get bogged down with often complex self-assessment tax returns.


What are the disadvantages of an umbrella company?


Although there are many benefits to working with an umbrella company, like with any option, there are some drawbacks.


Umbrella fees


The main drawback to operating through an umbrella company is that the provider will charge a fee in exchange for the range of benefits they offer the contractor.


Umbrella company fees will vary from company to company. However, contractors can expect to pay around £15 per week.


It is worth noting, however, that the umbrella company fee is classified as a legitimate expense by HMRC. This means it can be deducted from the contractor’s salary before it is processed for tax.


What’s more, although this is an additional expense to the umbrella contractor, it is also worth noting that most limited company contractors will opt to use an accountant's services to help with their finances and tax, which will also come at an additional cost.



Option 2: limited company


The second option is to operate through a limited company.


Here, rather than being employed by an umbrella company, the contractor works on a self-employed basis through their own limited company, which they must set up and run.


Rather than having an umbrella company take care of the business and financial side of contracting for them, the limited company contractor must take on these tasks themselves.


A limited company contractor will work as an off-payroll worker, meaning they must file for self-assessment. The contractor must set aside enough from their earnings to cover tax and National Insurance bills.


Now, let's examine the advantages and disadvantages of operating through a limited company.


What are the advantages of a limited company for contractors?


Freedom and flexibility


The main advantage to this route is that it gives the contractor complete freedom and flexibility as they are self-employed and therefore work for themselves and not an umbrella company.


What are the disadvantages of a limited company for contractors?


However, there are several drawbacks to this route, including:


Tricky tax calculations


As we have discussed, the limited company contractor is responsible for their tax returns. These can often be complex and time-consuming, so many decide to use the services of an accountant to help them out, coming at an extra cost to the contractor.


Business tasks and admin


Another drawback to this route is that the limited company contractor is responsible for setting up and running their own company. This means they must take care of many business tasks, spending time and energy on admin, paperwork, and invoicing.


No access to statutory benefits


Moreover, a limited company contractor is not entitled to statutory benefits. This means that they will not get paid for their time when they wish to take a holiday or need to take time off due to illness.


IR35


Finally, limited company contractors risk getting caught out by IR35 legislation. This is opposed to umbrella company contractors who, as employees, are automatically exempt from IR35.



Now you know how each option works and the pros and cons of each, it's time to make up your mind. Suppose you have decided that an umbrella company is the right path for you, like thousands of other contractors across the UK. In that case, you will need to find an umbrella company that works for you.


Umbrella Search is here to help


Umbrella Search makes it easy to find the best suite umbrella company. Whatever stage you're at in your contracting career, our friendly and professional team will work closely with you to find an umbrella company that's the best fit. To see how we can help, get in touch for a quote today and take the first step toward finding the best umbrella company for you.



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