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Limited vs Umbrella

Limited Vs Umbrella Company: Which Should You Choose?

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Limited Company
Vs Umbrella Company?

If you are deciding whether to use an umbrella company or go limited, Gorilla Accounting have prepared a comprehensive guide which breaks down the benefits of both to allow you to make your decision.

Typically, if you are to operate as a contractor or freelancer you would choose to operate through your own limited company or by employing the services of an umbrella company, each of which have their own advantages and disadvantages.

What is an umbrella 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.

Advantages of an umbrella company

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.

Disadvantages of an umbrella company

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.  

What is a limited company?

A limited company is an organisation that you can set up in order to run your business. However, limited companies are slightly different to umbrella companies. 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 form of salary and dividends. To form a limited company, the contractor will need to open a business bank account which your accountant can help with. 

Advantages of a limited company

Tax efficiency – Working through a limited company is the most tax efficient way of contracting. When working through a limited company you will take home between 75-80% of your contract pay as opposed to 60-65% of your contract if you were to operate through an umbrella company. 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. You could see how much you were to take home as a limited company contractor by taking a look at our take-home pay calculator. 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 clearly outline all of your expenses.

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 although with this in mind, you will receive full guidance from your accountant should you struggle with any aspect of running your own limited company.

Disadvantages of a limited company

Lack of privacy – When becoming a director of a limited company, you are required to submit details to Companies House, which will then become public record.

Administrative duties – As you are the business owner of your limited company, you will be in charge of all the administrative duties which come with running your own business. Limited company ownership means that you must keep accounting records which may include:

  • Details of any incomings and outgoings
  • Assets owned by the business
  • All goods that have been purchased and sold
  • Information on any debts the company may have

Still unsure?

If you’re unsure of any of this information, your Gorilla accountant would be on hand to assist you with any queries that you may have.

With the increased administrative responsibilities that limited companies have, this means that you may find yourself paying more money in accountancy fees. With this in mind, at Gorilla Accounting you would pay one set fee which includes no extra charges or hidden fees.

If you would like more information on choosing the right option for you, please get in touch as soon as possible by calling Gorilla on 0330 024 0406.


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