About A-Z Guide to Limited vs Umbrella

Setting up and running a limited company, where you become a director and the sole shareholder, is the most tax efficient way of contracting and has a number of advantages.

There are a number of advantages if you take the limited company route. For a start, you control your own finances. You can claim back a wider range of expenses, ie accountancy fees, equipment and software costs. The flat rate scheme allows you keep some of the VAT you receive, which is an important consideration. It is not difficult to run your own company as long as you have the services of a good accountant.

On the other hand, there are contractors who are put off by doing the necessary paperwork, beyond producing weekly or monthly timesheets. Others only intend to contract for short periods between longer phases of permanent employment.

This leads some to use the services of umbrella companies. In this instance, they enter into a contract with the umbrella company whereby they become PAYE employees again. The umbrella company then deals with their clients and takes responsibility for invoicing, paperwork, the collection of money due and payments to each contractor. 

The simplicity of this arrangement is offset by the fact that it offers little benefit for individual contractors in terms of reducing tax liabilities, and may actually increase their costs as service fees levied by the umbrella companies and may reach as much as 9% of the value of the contract. It is also worth noting that many umbrella companies insist on either a minimum level of charging or a minimum time for which you must pay for their services. (by comparison, accountancy fees for running a limited company are around £1,200 per year, irrespective of turnover). 

Before you turn to an umbrella company there are questions you should consider. 

• What exactly will they charge?
• Is there a minimum charge?
• What tax or accountancy qualifications does their form possess?

Forming a limited company is the best way to maximise your income, allowing you to take home more than when you are dealing with an umbrella company. 

IR35 Factor

If you are not willing to operate your business as a proper Small Business you will get caught up to IR35 legislation. Before 2007, (as the Managed Service Company Legislation was introduced in the 2007 Budget) there were few options with Umbrella companies. Now, only viable umbrella option is to use a PAYE Umbrella, which effectively means all income is paid as though the contractor is caught by the IR35. If you are a contractor running outside the IR35, you are far better off using a Limited liability. 

Below are the key differences of Limited vs Umbrella.

• How much your accountant going to charge you from the Limited Company.
• How much is the Umbrella company going to keep your money?
• If you are a high-end contractor paying 400+ per day and your work falls outside IR35, then you are better off with a Limited Company option. 
• You keep complete control of your financial affairs
• As a director, you have the 100% responsibility of your business including tax liabilities, Insurances and all other compliances fall within the business.
• You get paid directly to your business account and have the 100% control of your financials.
• Tax is much less compared to umbrella solutions (only if you fall outside of the IR35)
• Greater tax planning opportunities.
• You are your own boss.
• The ability to claim a wider range of tax-free business expenses, such as travel and subsistence, accountancy fees and hardware and software costs.
• VAT Savings if you are registered for flat VAT scheme (which allows you to charge 20% VAT but only pay back HMRC 14.5%)
• Opportunity to expand your business.
• You can have multiple sources of income and also look at the options of taking more contractors or employees onboard. 
• Running your own business is not difficult (it may be time-consuming but it is not hard).
• There is a certain amount of paperwork involved.

Umbrella Solution 

• Your burden of running the company will disappear and umbrella company will take care of the Tax and all other admin matters. 
• You do not get paid directly from the agent or the client as money will be paid to your umbrella company and you will be get paid once they deduct their fee and taxes.
• You get paid what your umbrella company pays.
• Very easy to use and you simply enter your timesheet, expense details and wait to be paid.
• NO need to worry about VAT/ PAYE/ Tax returns (you still need to do your personal returns though).
• It is worth of considering an umbrella solution if you are a first timer until you can get the grip of your liability. Once you gain more experience in the contract market, you can switch to a limited company (possibility after 1-2 years of operating under an umbrella). 
• Make sure your umbrella company is a reputed and well-experienced institution as your money will be handled through them (there must be an element of trust).
• If you are a first timer, there is a possibility that your first invoices will be paid as one lot (can take up to 2-3 moths time if you paid monthly). So there must be an element of trust.
• Once you signed up with your umbrella company then they will become your employer and they have the control of your payments along with NI responsibilities. 
• Some Umbrella companies offer some employment rights such as holiday, sickness, maternity or paternity pay.
• Do your ground work and carry out proper research before you sing with any umbrella firms. (ask from colleagues, friends, look at online reviews etc…) Also, make sure that your umbrella company is a member of the FCSA (Freelancer and Contractor Services Association).

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