Contractors and freelancers in the UK commonly face two options to operate: being the director of a limited company (personal service company) or becoming an employee of an umbrella company. In this guide, we explain both options and the advantages and disadvantages of each. One of the main factors that may influence your decision is IR35. If you are working on assignments inside IR35, an umbrella is likely to be your best option. Alternatively, if you are working outside IR35, you may decide to reap the rewards of working as a limited company director.
If you are new to contracting and are interested in discussing your options, you can schedule a free consultation with a Churchill Knight professional by clicking here. Alternatively, please call our team today on 01707 871622.
For decades, operating with a limited company (personal service company) has been a popular choice for UK-based contractors and freelancers. Setting up a limited company creates a separate structure for your business and gives business directors limited liability, meaning personal finances that only the money put into the business is at risk. There are plenty of advantages and disadvantages of contracting with a limited company, and we explore these below.
Limited liability – Operating with a limited company gives you, the business owner, limited liability. This will protect your personal assets should your business struggle. Limited liability is commonly considered the biggest advantage of running a limited company.
Tax efficiency – Limited company directors can pay themselves with a combination of salary and dividends, and this is more tax-efficient than Pay As You Earn (PAYE) – HMRC’s tax system for employees. The same applies to contractors and freelancers with a limited company – they can pay themselves with salary and dividend payments, but only when working on assignments outside IR35.
It’s easy to set up a business – Setting up a limited company is a straightforward process, and you can do it yourself in minutes or use the services of a professional accountant to assist you.
Business expenses – Trading through a limited company will allow you to benefit from claiming business-related expenses such as accountancy fees, professional subscriptions, fees that occur as part of business travel, and more.
Shares – You can create share classes which is helpful when it comes to tax planning and if you are interested in attracting investors or dividing the ownership of your company.
Selling the company or passing it on is easy – Because your limited company is a separate entity, if you choose to sell it or pass it on to someone else, it’s an easy process.
IR35 – Since the introduction of IR35 (2000) and changes to off-payroll working in the public (2017) and private (2021) sectors, there appear to be fewer outside IR35 temporary assignments. As a result, more and more temporary workers are required to use PAYE umbrella companies for their payroll – eliminating the advantages of being a limited company director. There is a lot of additional legislation that limited company directors must adhere to.
Plenty of administration – While setting up a limited company is easy (via Companies House), limited company directors have a lot of important responsibilities to remain compliant with UK tax laws. Every year, you must file Annual Accounts with HMRC and Companies House and complete a Confirmation Statement.
Contractor accountants can be expensive – Hiring a contractor accountant is popular amongst contractors and freelancers with a limited company because there are many administrative responsibilities. However, contractor accountants can be pricey. It’s well worth shopping around and comparing accountancy services among the most popular accountants in the UK.
Not ideal for short-term contractors and freelancers – Setting up a limited company is a big responsibility. If you are new to contracting or freelancing, you will probably want to try it without going through the processes involved in setting up a limited company.
Branding – Setting up a limited company may inspire you to create a business logo and professionally designed paperwork (such as a letterhead, invoice, quotation template, etc.). However, doing so can be very time-consuming, and outsourcing may be expensive. The same applies to whether you decide to have a company website and professional emails.
Public domain – All your company accounts and information is available in the public domain. While some people won’t be bothered by this, some prefer privacy.
Tens of thousands of UK-based contractors and freelancers use umbrella companies for their payroll. There are plenty of advantages and disadvantages that you should consider, and we’ve summarised these below.
Compliance – Using an umbrella company helps you comply with UK tax rules. Compliant umbrella companies will process your payroll with Pay As You Earn (PAYE) – HMRC’s tax system. This ensures that the correct deductions are made to your salary and sent to HMRC (just like an employee). Churchill Knight Umbrella is accredited by the FCSA and has recently become a SafeRec Certified Umbrella Company. We take compliance extremely seriously, and we’re proud to have these accreditations to showcase our dedication to providing the best payroll service to the UK’s temporary workforce.
No tie-in period – Umbrella companies are there for you to use when needed. You will not be required to pay any joining or leaving fees, and the umbrella company’s margin (the small amount they deduct from your assignment rate, similar to an “admin fee”) only applies when the umbrella pays you. Therefore, you can remain on the books of an umbrella company between contracts without any fees applying.
Administration – When registering with an umbrella company, you must provide them with personal information, including name, address, date of birth, NI number, assignment details, and bank information. You will also need to provide proof of your right to work (RTW) in the UK and sign and return a contract of employment. Once you have done this and officially become an employee of an umbrella, the ongoing administration is minimal. To be paid on time, you will need to submit signed timesheets unless your agency is self-billing, but overall, the administrative burdens of using an umbrella company for your payroll are minimal, especially compared to being the director of a limited company.
You can use the same umbrella for your temporary assignments – If you continually work on inside IR35 assignments, you can use the same umbrella company for all of your assignments – saving you the hassle of having to register with multiple umbrella companies in a short space of time.
Continuity of employment – Following on from the point above, using the same umbrella company allows you to benefit from continuity of employment. Not only does this reduce potential admin that occurs when you transfer between umbrella companies, but it can help you financially. Continuity of employment means you have the same umbrella (employer), helping contractors to source external finance from banks and mortgage lenders.
Employee Benefits – As an employee of an umbrella company, you will have access to Employee Benefits, including Sick Pay and Maternity/Paternity Pay.
Low costs – Assuming you use a trustworthy umbrella company, you will almost certainly benefit from an excellent value service. Umbrella margins usually apply weekly and vary between £15 and £30, significantly less than hiring a contractor accountancy to support you with the administrative responsibilities of running a limited company.
Plenty of choice – There are over 500 umbrella companies in the UK. With so much choice, you should never put up with a substandard service. It’s important to remember that you are responsible for your tax affairs. Therefore, it’s essential you pick a compliant umbrella company and it’s recommended you pick one with a professional accreditation from the FCSA. If you ever suspect your umbrella company is not paying you compliantly, leave them immediately and report them to HMRC.
SafeRec – SafeRec is transforming compliance and transparency in the umbrella company marketplace. Powered by Artificial Intelligence (AI), SafeRec Certified Umbrella Companies will issue you with a payslip audit every time you are paid – allowing you to see whether you’ve been paid correctly and all the deductions are legal and accurate. Before SafeRec, this level of transparency had never been achieved. Churchill Knight Umbrella is one of the first umbrella companies in the UK to become SafeRec certified, and more information is available here.
Lack of control over finances – Being the director of a limited company gives you great control over your business finances. However, the opposite can be said when using an umbrella company because you’ll be paid your net salary directly into your personal bank account, with all deductions made to HMRC on your behalf (by the umbrella). For some, this will be an advantage. However, for seasoned limited company professionals, it’s a major disadvantage of using an umbrella.
PAYE – There is no hiding from it: the most tax-efficient way to operate as a contractor or freelancer is through a personal service company (PSC) working on outside IR35 assignments. This is because you can pay yourself with salary and dividend payments. However, while PAYE may not be as appealing, you will know you are paying the correct tax and NI, which should at least give you some peace of mind.
Potential payment delays due to supply chain – For you to be paid on time, your end client needs to send your gross funds to your agency, and then your agency needs to send your assignment rate to the umbrella company. The umbrella will then process your payroll, make the correct deductions and send your net salary to your bank. However, if your client is late sending your funds down the chain, you could be paid late, and it might not be the fault of your umbrella.
Tax avoidance schemes – Unfortunately, while most umbrellas provide a compliant service, there are a handful of tax avoidance schemes out there targeting contractors and freelancers. It’s essential you conduct thorough due diligence and use a compliant umbrella, because using a non-compliant payroll company (even by mistake) could land you a serious fine or penalty from HMRC.
Statutory Benefits are not as good as the benefits permanent employees may have access to – Statutory Employee Benefits are certainly a positive reason to use an umbrella for your payroll. However, some employers will offer permanent employees better benefits and more than just the Statutory employee benefits you can access.
Changing umbrella companies is hassle – It’s true, changing umbrella companies is a little tedious. Firstly, you need to let your current umbrella know your desire to leave so they can issue you a P45. You then need to identify a new umbrella company and go through the registration process, which can sometimes take upwards of 15 minutes. However, you should never put up with a substandard service, and if you think your current umbrella is non-compliant with UK tax law, you should move immediately.
With the information on this page in mind, should you use a limited company or umbrella company for your payroll? Essentially, it’s entirely your decision. However, to remain compliant with UK tax laws and legislation such as IR35 (off-payroll working), you may legally be required to receive your income taxed with Pay As You Earn (PAYE), making an umbrella company the only feasible option.
Setting up and running a limited company is the best method of maximising your pay retention, assuming your work assignments are outside IR35. However, only some contractors are comfortable with the administrative responsibilities that arise as the director of a limited company. Therefore, opting to use an umbrella company may be your preference. Once you have completed the registration process, it’s straightforward to work on your assignments, submit timesheets and be paid on time.
However, if you work inside IR35, there might be other options than using an umbrella company. A handful of recruitment agencies offer in-house payroll (usually called agency PAYE), and you may prefer this route to eliminate adding a third party into the supply chain.
Whatever you decide, you must understand IR35 and the pros and cons of setting up and running a limited company and using an umbrella company. Complying with HMRC’s rules and regulations is essential, and if you are unclear about your best option, contact a professional accountant or umbrella company, such as Churchill Knight Umbrella, for a free and impartial consultation. It is also worth speaking with your agency (or directly with your end-client) to see if they have any helpful advice about the assignment and ensuring you are paid efficiently and compliantly.
Founded in 1998, Churchill Knight is a leading provider of contractor accountancy and PAYE umbrella payroll. We have been committed to providing a compliant and transparent service from the beginning. We’re proud to have professional accreditations (limited company and umbrella) from the Freelancer and Contractor Services Association (FCSA) – the UK’s leading professional body dedicated to ensuring the supply chain of temporary workers complies with HMRC’s rules and regulations.
Churchill Knight has been providing contractor accountancy services for over 25 years. If you are interested in setting up a limited company or switching to our FCSA-accredited service, please call our Sales Consultants on 01707 871622 or request a call back for a convenient time. More information about our limited company accountancy is available here.
As well as being accredited by the FCSA, Churchill Knight Umbrella is a SafeRec Certified Umbrella Company. This means that all of our employees receive a payslip audit every time we process their payroll – allowing them to check they have been paid correctly, compliantly and that no unethical or hidden deductions have occurred. SafeRec Certification puts compliance in the power of contractor and freelancers, and it means non-compliant umbrella companies have nowhere to hide.
If you are interested in a free, tailored take-home pay calculation from one of the only FCSA accredited and SafeRec certified umbrella companies in the UK, please click here or give our friendly Sales Consultants a call on 01707 871622.
Churchill Knight & Associates Ltd and Churchill Knight Umbrella are proudly accredited by the Freelancer and Contractor Services Association (FCSA). The FCSA is the UK’s leading professional body dedicated to ensuring the supply chain of temporary workers is compliant with HMRC’s rules and regulations. We believe that being an accredited member of the FCSA is the best way to showcase our commitment to compliance within our sector.
Whether you’re using one of our limited company accountancy packages (Churchill Knight & Associates Ltd) or you’re an umbrella company employee (Churchill Knight Umbrella), you can rest assured knowing that you are in the very safest hands.
