In this article, we aim to provide clarity on umbrella company features vs limited company so you can better understand which is best suited to your specific employment needs.
Working as a contractor can be a rewarding career path and offer you flexibility, varied career options, and greater earning potential. However, before committing to contractor work you will want to consider the options and make sure you fully understand the differences between an umbrella company and a limited company.
What is it?
When joining an umbrella company as a contractor, you become an employee of the umbrella company. All taxes and National Insurance contributions are taken care of by the umbrella company and you will receive a net salary on a weekly or monthly basis, depending on your own preference. It is calculated based on the hours you work. It is a simple set up to keep administration to a minimum.
The setup process is straightforward when joining an umbrella company, just an initial registration process and you’re ready to start working and earning money.
You tend to earn less take-home pay than a limited company, but with a limited company, there is more administration involved. Time is also a cost, so it is about working out the trade-offs and what is more valuable to you. Whereas an umbrella company will deduct tax and National Insurance from your pay, keeping things hassle and stress-free.
The beauty of umbrella companies is that they deal with the administration for you, the only administration you really need to do is submit your timesheets each week or month.
You will have limited control over your pay rates and the methods of payment, this is always PAYE.
What is it?
A limited company is a separate legal entity, you operate it as a director and shareholder. You are required to open a business bank account and the company pays taxes separate to you as an individual person. Any salary payments you will be required to declare as wages and dividends. The major drawback is the administrative workload.
The process of forming a limited company tends to take more time, as you’re required to fill out paperwork and then also setting up an appointment to register your business bank account. Generally speaking, it is not as straightforward as joining an umbrella company and getting straight to work.
The level of take-home pay is generally better, as you will take money from the company as wages and dividends.
The administration for a limited company is a lot more intensive, as you’re required to file various company documents with HMRC and Companies House to ensure you’re adhering to government regulations, while also ensuring accurate taxes and deductions are made and paid on time.
Control is more in the hands of the limited company owner, as director and shareholder you control the future of the company and your own career. You do not have a limit to the volume of contracts you take on. However, with greater control comes greater responsibility and more work.