Limited vs Umbrella

Limited Vs Umbrella Company: Which Should You Choose?

Limited Company vs Umbrella Company?

Typically, if you are to operate as a contractor or freelancer in the UK, you must choose your operating structure before you start trading, which means becoming a sole trader, setting up a limited company, or employing the services of an umbrella company.

For many, a limited company is regarded as the most appealing option, largely because of the many benefits it offers.

However, working through a limited company is very different from working through an umbrella company. Therefore, it is essential to consider all factors.

At Gorilla, we like to help our clients make an informed decision on the best route for their business. Below, we have provided a comprehensive guide on operating as a limited company, including its advantages over working through an umbrella company.

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A limited company is a business structure in which a company has been set up as a legally separate entity to its owners (whether shareholders or directors). It must be registered at Companies House.

A limited company is a private company whose owner is legally liable for its debts, only to the extent of the amount of capital they invested.

Limited companies can offer more control as the director of the company controls invoicing, the bank account, and the amount they receive in the form of salary and dividends.

You can set up a limited company as an individual in the UK as long as you’re a minimum of 16 years old and not a disqualified director or an undischarged bankrupt.

When completing the application to register as a limited company at Companies House, you’ll be required to name one director and one shareholder. However, you can list the same person for both of these positions, making it ideal for business owners who are operating on their own without a partner.

This can be edited further down the line if you do bring on other members.

There are numerous benefits to working through a limited company.

Tax Efficient – Working through a limited company is usually the most tax-efficient way of contracting. As you are in charge of all of your finances, a limited company contractor has greater opportunities for tax planning. You will also be able to claim on a wider range of expenses and have access to the flat rate VAT scheme. Feel free to use our tax calculator to see how much you could be taking home as a limited company contractor.

Expenses – As a limited company owner, you would be able to claim on a wider range of expenses. Expenses are costs that are incurred for the running of your business, such as equipment that you may use or business travel. As you will have full control of your own limited company you will be able to claim any relevant expenses that apply to your business.  Most allowable costs will receive corporation tax relief, reducing your company corporation tax liability.

More control – Owning your own limited company means that you maintain complete control of your business finances. You will not have to deal with any third parties to get your income as this will all be dealt with by yourself. You keep full control of your company and your accounts.

Separate entity – Legally, a limited company is completely separate from its owners. This means such aspects as bank accounts are kept independent from those of the shareholders.

Professional status – Trading as a limited company is often seen as the more professional route, allowing you to create a better impression on potential clients. Due to being registered at companies house, limited companies are regarded as being more transparent, which has its own benefits, too.

An umbrella company is where a contractor essentially becomes an employee of the umbrella company and has to carry out specific tasks such as submitting timesheets to the umbrella. This is often a preferable option for those on short-term contracts, but there are numerous setbacks for those looking for a more permanent solution.   

In most cases you will be paying a much higher rate of tax on everything you make. In addition, there will be additional fees for using the service of an umbrella company.

You will be required to pay extra fees such as administration fees and you will not enjoy some of the tax benefits found with a limited company.

If you choose to operate under an umbrella company, this is where you as the contractor essentially become an employee of the umbrella company. You submit timesheets to the umbrella who will then invoice the end client or agency, for the work done by you. This option is typically favoured for more short term contracts.

Ease of use – One of the main advantages of choosing to operate under an umbrella company is the ease of use. Typically, the only work that you will need to do is simply enter your timesheet and expense details and wait to be paid. This is a very hands off solution as everything will be taken care of.

Less hassle – Umbrella companies could be seen as less hassle for a number of different reasons. One main reason for this is because all tax and national insurance is deducted before you receive your money, meaning that you will have no further taxes to pay. Someone else will be taking care of all of your paperwork which is good if you do not feel confident or have the time to do this yourself.

Suitable for temporary contractors – With the simplicity of umbrella companies, this means that they provide a great temporary solution for those that are only planning for a short period of time (usually three months or less). Umbrella companies offer a low-risk option for those who are still unsure if they would like to get in contracting long term so this could be perfect if you are looking to start as a contractor, or you’re still unsure whether contracting is for you.

View our comprehensive article about the advantages of a limited company for more information.

Cost – The major disadvantage that many people face when working through an umbrella company is that it is the most expensive way to operate. You’ll be paying a much higher rate of tax and PAYE on everything you make. In addition, everything the umbrella company invoice the client for will have an extra amount on top. As mentioned you will need to pay extra fees such as administration fees and you will not enjoy some of the tax benefits found with a limited company.

Lack of control – When operating under an umbrella company, someone else will be in charge of all your paperwork so this means that you will have a lack of control which could be seen as a disadvantage.

How can Gorilla Accounting Help?

With the increased administrative responsibilities that limited companies have, you may find yourself paying more money in accountancy fees.

If you would like more information on choosing the right option for you, please get in touch as soon as possible.

At Gorilla Accounting, we ensure you only pay one set fee which includes no extra charges. You’ll also receive full guidance from your accountant should you struggle with any aspect of running your own limited company.