Umbrella versus Limited Company

UK contractors have two choices when it comes to deciding how to operate. They can either use a PAYE umbrella company or, alternatively, set up their own Limited Company. Both of these solutions offer several advantages and disadvantages and making the right choice for you depends on several factors. 

Some of the elements you’ll need to consider when choosing the right option for you include:

  • Level of experience
  • Time available to spend on paperwork
  • Confidence in dealing with financial matters independently
  • The length of time you’ll be contracting
  • How frequently you’ll be operating outside IR35 legislation
  • How important it is to you to have full control over your contracts 

Let’s look at what’s involved in both options.

Forming A Limited Company

If you choose to be a contractor with your own Limited Company, you’ll need to setup a Ltd Company, and have sole responsibility for your accounts, taxes and salary. Most contractors choose to engage the services of an accountant to take care of all of this.

You’ll be responsible for opening a business account for your transactions. As the director, you’ll be responsible for that bank account as well as invoicing.

Using A PAYE Umbrella Company 

If you choose to be a freelancer who works under a PAYE umbrella company, they will be acting as an employer, taking over all of the above-mentioned responsibilities. All you’ll need to do is submit a timesheet and the umbrella company will pay your salary to you, having already deducted tax and National Insurance.

Who Should Choose To Set Up A Limited Company?

In general, you should consider setting up a Limited Company if:

  • You will be contracting in the long term
  • You are experienced and confident in your abilities to run all aspects of your business yourself
  • You are happy to put in a lot of time and effort into administration and paperwork
  • You feel confident with dealing with accountants and HMRC, and are happy to take responsibility for submitting returns and payments within set deadlines
  • Most of your contracts are outside IR35*
  • You believe it’s important to present yourself as the director of your company and to be responsible for taking all major decisions

Who Should Choose To Use An Umbrella Company?

In general, you should consider using an umbrella company if:

  • You’re a short-term contractor
  • You don’t feel confident in running all company elements yourself
  • You aren’t comfortable in dealing with finances
  • Most of your contracts are inside IR35
  • You don’t have time to deal with administrative paperwork
  • You don’t mind giving up some control of your business 

*The recent IR35 reforms have added another layer of complexity and highlighted the need to get it right from the start.  

The reforms to the public sector in April 2017 shifted the responsibility for determining IR35 status from the contractor to the public sector body.  For many public sector bodies, this has made determining the suitability of a limited company structure a complex decision, and, as such, many made sweeping IR35 classifications enforcing umbrella employment; this dismissive approach was not wholly welcomed by HMRC, and welcomed less so by contractors.

These ‘off-payroll’ rules are to be extended to the private sector by April 2020, with lessons learned from the earlier pitfalls.  The reform will mean that if you are working on a private sector contract with a large or medium sized company, the end client will primarily be responsible for determining your IR35 status as a contractor.  If you are caught by IR35, you will be required to pay NI and income tax, decreasing your take-home pay and making your accounting more laborious.  Pending this reform, it is generally the case that, operating through a limited company, you can maximise your take-home pay by tax planning and structuring the way you pay yourself through dividends and/or salary.   

It’s important to weigh up all the pros and cons of both options so that you can be confident you make the right choice. Whilst we can try to summarise the salient factors that may influence your decision, we would always advice you to speak to us directly to discuss your personal circumstances.  We understand that it can be difficult to decide which of these two routes is better for you, as experts in the contractor accountancy field we can offer you all the information and advice that you need to make the best decision for you. Please don’t hesitate to pick up the phone to speak to one of our advisors.