Umbrella company vs limited company

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Limited Vs Umbrella

Last updated on Tuesday, April 4, 2017

Written by Churchill Knight

Like many embarking on a career in contracting, you will probably find yourself wondering what is the best way to set up and run your new business. For most contractors this choice essentially comes down to operating under an umbrella company, or establishing and running your own limited company.

Umbrella Company

Operating under an umbrella company is seen as the quickest and simplest method for some contractors. Essentially this means you become a PAYE employee of the umbrella company.

Advantages

  • Limited Admin Work: You can minimise the administration work you have to complete. An umbrella company will take the responsibility for invoicing and other attributed paperwork.
  • No Risk of an IR35 Investigation: The majority of umbrella companies market themselves as a solution to IR35. Their solution is to ensure you pay full tax and National Insurance contributions as if you are inside IR35, and therefore you are not at risk of any potential investigation.


Disadvantages:  

  • Tax Efficiency: It is not the most tax efficient route to maximise your take-home pay.
  • Control of Your Finances: Umbrella companies offer a ‘one size fits all’ payroll solution. You are paid as an employee of the umbrella company, and thus you miss out on the added benefits of having total control of your finances. For example, flexibility in the tax year as to when you pay your tax, or being able to take a directors loan at 0% interest.      


Limited Company

Many contractors decide to run their own limited company, and do so through a specialist contractor accountant.

The contractor accountant assists with the formation of the limited company and its smooth running.

You become a director and shareholder of the limited company, paying yourself with a combination of salary and dividend payments. Operating a limited company ensures that you receive the maximum legal take home pay.

Advantages

  • Tax Efficiency: The main advantage of operating a limited company is the tax efficiency that it brings. As a director of the limited company, you can opt to pay yourself a salary up to the National Insurance Contribution threshold, thus avoiding the cost of Income Tax. Further payments are drawn by you as dividends, which incur no tax until you reach £31,785 (HMRC 2015/2016).
  • Scope of Expenses: The advantage of operating a limited company is the scope of expenses you can claim against.  Even the accountancy fees associated with running a limited company can be offset as expenses against corporation tax.


Disadvantages

  • Admin Work: When compared to an umbrella company, the main disadvantage of running a limited company is the admin and paperwork involved.  


Limited Company vs Umbrella Company Take home Pay Comparison
The chart below highlights the difference in the take home pay you could receive whilst operating through a limited company vs operating under an umbrella company.

Examples of weekly take home pay

Gross/wk

Umbrella Co

Limited Co

£ 1,000

£ 644.49

£ 849.97

£ 1,500

£ 909.24

£ 1,269.97

£ 2,000

£ 1,163.82

£ 1,689.97

£ 3,000

£ 1,673.38

£ 2,529.97

 

So which is right for you?

How will you decide which payment solution is right for you?

Ask yourself, is a little extra paperwork worth the considerable amount of extra income that running a limited company can provide you?

Whilst the thought of additional paperwork can be daunting for some, most of Churchill Knight’s contractors choose to operate via their own limited company.

Using a specialist contractor accountant such as Churchill Knight & Associates Ltd (a specialist contractor accountant since 1998), will keep your paperwork to a minimum, whilst minimising your tax and maximising the expense advantages offered by running your own limited company.

 

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