Decided to go with an umbrella company?

We can help you find the one to suit your needs.

Decided to go with an umbrella company?

When you’re considering the difference between an umbrella and a limited company, it’s important to remember that there’s no one choice that’s right for every contractor. It may be that you start your contracting career working under an umbrella and then your needs change and you decide to start your own limited company.

Whatever you choose, it’s important to take stock of the way that you do business and consider what kind of worker you are and where you’d like to put your energy. As far as your potential business structure goes, the more control you have over every aspect of your working life, the more take-home profit is generally available to you. However, this increased level of control comes with increased levels of responsibilities and concerns, things that don’t always guarantee a stress-free working life.

Our guide looks at four important aspects of contract work and how they’re usually dealt with under each business structure. This should help you decide whether or not you want to become a limited company or umbrella contractor.

Take-home pay

When it comes to umbrella vs ltd. company earning power, there is little debate. If you run your own limited company, working the same contract and charging the same fee as an umbrella employed contractor, you will receive substantially more of that fee as potential take-home pay.

If you are working under an umbrella company, on average you can expect to take home 60 – 65% of your contract rate.

If you run your own limited company, on average you can expect to take home 75 – 80% of your contract rate.

Why the big difference? The chief expense of working under an umbrella company is paying the company a commission for processing your fee and deducting all the necessary tax and National Insurance. Umbrella companies can also cover you with their Professional Indemnity, Public Liability and Employer’s Liability insurance and some will even provide Personal Accident insurance.

A contractor running a limited company will take the entirety of their day rate but they have to pay for things like insurance themselves. However, they can also recoup the cost of their work expenses from the company (things like travel and lunch), an option almost entirely unavailable to umbrella company contractors who are classed as PAYE employees and not subject to the same expense procedure.

Flexibility and Rights

The ltd. company vs umbrella question is ultimately solved by the contractor’s attitude to risk. Working under an umbrella company offers less in the way of financial remuneration but it does offer the legally mandated benefits for contractors classed as employees – this includes things like sick pay, maternity leave and holiday pay.

If you’re planning to start a family in the near future, this sort of protection could be important to you. The sense of being able to ‘pick up’ after maternity/paternity leave has finished is heavily increased if you have a corporate structure beyond yourself carrying on business as usual.

That said, if your limited company is doing well and you have carefully allotted yourself the savings and time that you need, you can run your life a lot more flexibly and take exactly the amount of time off that you deem fit. It’s just a question of how easily you can provide a cushion for yourself should you become ill, injured or need time off for any other reason.

Access to clients

It’s a sad truth that many potential end clients, particularly those in the public sector and sometimes even those who supply them, are leery of using contractors with a limited company. The reasons for this are complex, but it broadly comes down to such entities being extremely risk-averse coupled with HMRC’s new policy that clients are responsible for determining if the contractor they use falls under IR35 or not.

Contractors may also find that certain recruitment agencies heavily request that they use a specific umbrella company if they want to undertake their assignments. It’s always worth remembering that you have a legal right to choose any umbrella company you want and to treat any agency that suggests otherwise with caution.

Administrative work

This is another area that will really help clarify whether to choose an umbrella company or a limited company – your tolerance for paperwork. The beauty of an umbrella company is that all the difficulty of dealing with HMRC, insurance, chasing invoices is taken out of your hands, in exchange for a chunk of your daily rate. That said, if you run a limited company, there are plenty of ways you can outsource your administration should you wish to – it’s fairly standard practice to employ an accountant to deal with things like setting up and registering your company, settling your taxes and streamlining your expenses.

It’s also worth remembering that as a business, you can take your expenses off your gross profits, so you can save on things like VAT, travel and accountancy fees, which are taken off before taxation begins. That said, this is only a great perk if the money exists in the business in the first place. If you’re bringing in more than £25-28,000 then it is well worth becoming a limited company as there are potentially enormous savings to be made.