LIMITED VS UMBRELLA – HOW TO DECIDE

by | Oct 7, 2019 | Guides & Resources, Ltd Company, Umbrella

When starting out as a contractor, one of the first things you must do is decide whether to work for an Umbrella company or set up your own limited company. There are advantages and disadvantages with either option, the right choice will depend upon your preferences and personal circumstances, and perhaps your clients will even have a say in the matter.

Our specialist contractor accountants are here to provide you with the advice and information you need about your working options. Here, we outline 5 things you should consider before deciding which working option will suit you best.

How much responsibility are you willing to take?

Running a limited company entails a level of administration, and you’ll have the responsibility of meeting your obligations as a Company Director. You’ll need to prepare annual accounts and make submissions to HMRC and Companies House as well as ensure you pay the correct taxes. This isn’t usually onerous, particularly with the support of specialist contractor accountants like JSA, but it’s not for everyone. If you don’t want this responsibility, then it may be that you are more suited to Umbrella working.

Do you want access to a company pension?

If you join an Umbrella company you’ll be entitled to the same rights as any other employee, including access to a company pension scheme. If you set up a limited company for contracting you will need to make your own pension arrangements.

Are you ‘caught’ by IR35?

IR35 is legislation which seeks to ensure freelancer workers pay the correct amount of tax. There are strict criteria which dictates whether IR35 applies. If your role is ‘caught’ by IR35 then it may not be appropriate to work through a limited company – you could end up paying significantly more tax. If this is the case, then an Umbrella company is likely to be the best alternative solution for you. Read our Guide to IR35 to find out more.

Are you happy to invoice your clients and chase payments?

If you set up a limited company for contracting, you’ll be responsible for invoicing your clients, tracking payments and chasing any outstanding invoices. If you work for an Umbrella, on the other hand, you simply submit your timesheet to receive payment. The Umbrella company is responsible for invoicing your client or recruitment agency, so it’s less hassle for you. Also, your Umbrella company will deduct Income Tax and National Insurance directly from your pay, so you can rest assured knowing that your taxes are correctly calculated and paid.

Are employee benefits important to you?

As an Umbrella employee, you are entitled to holiday pay, sick pay, maternity/paternity and adoption leave among other benefits. As a limited company contractor you will not have these benefits so will need to make your own arrangements to cover any income you may miss out on when taking a holiday or extended leave. Again, this will need forethought and consideration before you decide whether a limited company is right for you.

An additional benefit of working through an Umbrella company is that you will build a record of continuous employment. This is helpful if you are likely to need to apply for a mortgage or other type of loan.

Find out more

We are here to help you get the most out of working as a contractor. To find out more, please download Guide to Umbrella Contracting and Guide to Limited Company Contracting or get in touch with a member of our team who will be pleased to help.

JSA Group

Specialist outsourced accountancy and payroll services for recruitment agencies, freelancers, contractors and umbrella workers. We’ve built up expert knowledge and experience within the industry by supporting tens of thousands of customers for 30 years.

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