Limited or Umbrella?

Choosing between limited or umbrella can be a difficult decision, especially if you are new to contracting. There are advantages and disadvantages to both setting up your own limited company or working through an umbrella company.

The most successful contractors have done their research to find the best payroll option for them. Whether the right path for you is setting up your own limited company, or using an umbrella company, depends on your working circumstances and your preferences.

Continue reading to find out the benefits of each option, and gain some insight into which is the right choice for you.

Setting up your own limited company is the payroll option that will legally maximise your take home pay, in full compliance with HMRC legislation. You will become both the director and a shareholder of your company and can pay yourself with a combination of salary and dividends.

Running a limited company is the most tax efficient payroll option, especially for contractors operating outside IR35, and you can claim back a wide range of expenses including the VAT on services like accounting. The amount you take home is favourable, especially in comparison to using an umbrella company service.

Setting up and running a limited company has some drawbacks. The initial paperwork and ongoing administration can be demanding for some and this is why so many contractors decide to use a reliable contractor accountancy service. Contractor accountants will handle the set-up of the company along with a majority of the paperwork involved; from registering with Companies House, setting up payroll and registering the company for Corporation Tax and VAT. By choosing to use this option, many contractors save themselves the hassle and gain valuable amounts of time.

Contracting through a limited company in a nutshell:

• The most tax efficient way to legally maximise your take home pay
• Tax relief on a variety of costs and expenses including pension contributions and mileage
• A contractor accountant can make your life easier by eliminating a majority of the administration and providing advice, although this service is more expensive than using an umbrella company
• Flexibility, freedom and control over your finances and for advanced tax planning

Churchill Knight & Associates Ltd has helped over 20,000 contractors. Our contractor accountancy services are designed to ensure you have complete peace of mind when running your business.

Contractors who are looking for a quick payroll set up and minimal administration often decide to get paid using an umbrella company. This is a simple method to receive payments from your client. If you decide to join an umbrella company, you will officially become their employee. The umbrella company is responsible for invoicing your client and making sure that you receive your salary after deductions for tax, National Insurance and the umbrella’s margin.

Using an umbrella company is suitable for any contractor. However, umbrella companies are typically used by first time contractors, contractors on a short term assignment, contractors working in the public sector and contractors who do not want their own limited company.

Using an umbrella company is not the best option if you are entirely focused on maximising your take home pay. Because you will become an employee of the umbrella company, you will be paid PAYE as if you were in permanent employment. This will remove a lot of the benefits that contractors look for when they choose to become self-employed, including receiving dividends and company loans.

Contracting through an umbrella company in a nutshell:

• Quick set up
• No joining or leaving fees
• Minimal administration
• Salary paid via PAYE by the umbrella company
• Employee Benefits
• Insurances included
• Lower take home pay than contracting through a limited company

Churchill Knight Umbrella is the perfect PAYE payroll solution for contractors who do not want to set up their own limited company. We’ll make your life easier by taking care of a majority of your administration, as well as paying your tax and NIC on your behalf.