Limited Company
Setting up as a Limited Company means you are an independent entity, responsible for the company’s financial affairs. Your company holds a contract with the end client or recruitment agency and invoices them directly for the agreed pay rate. As the company director, you – with advice from your accountant! – handle invoicing, the company bank account and decide how to pay yourself. You can claim a wider range of expenses, as long as you are working Outside IR35, see our IR35 section for further information. A Limited Company is the most tax efficient way to work and you generally take home 75-80% of your earnings.
Umbrella Company
Working through an Umbrella company means that you become an employee of the Umbrella Company. You typically only need to submit timesheets and expenses and they will handle the rest. The Umbrella Company take their profit from the income they receive, from the recruitment company/end client, and is responsible for paying all applicable taxes and National Insurances before you receive your pay. The expenses you can claim through an Umbrella Company are more restricted. Through an Umbrella Company, you generally take home 60-65% of your earnings. However, the administrative burden is lower and you do receive the benefits of employment – statutory sick pay, parental pay, insurances and suchlike.
Limited vs Umbrella – So which one should I choose?
| You should work through a Limited Company if… | You should work through an Umbrella Company if… | |
| You earn over £25,000 per year, or £100 per day | You earn less than £25,000 per year, or £100 per day | |
| You want to maximise your take home pay and minimise your tax liabilities | You want to minimise administration and paperwork | |
| You are a career contractor or expect to be contracting for an extended period of time | You are only contracting short term or don’t know if you will continue to contract | |
| You want to work for yourself and take responsibility for your own finances | You want to be employed, with the employment rights that includes | |
| You are happy to determine IR35 status and accept the risk of being caught Inside IR35 | You want the risk of IR35 to be removed | |
You should be aware that…
| You are responsible for invoicing and maintaining accurate accounts | All income is subject to PAYE tax and NICs, and your take home pay will be lower | |
| You will need to arrange insurance in order to work for clients | The Umbrella Company makes its profit by taking a margin from your invoice value | |
| There is additional administration involved, compared to working through an Umbrella | Only very limited expenses can be claimed through an Umbrella | |
Dolan Accountancy offers both a Limited and Umbrella solution for just £125 + VAT per month. To find out more about our services click here or to find out more about contracting, download our complete contractors guide.
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