Umbrella Company vs Own Limited Company

The partnership has lots to offer when people enter into a partnership business. There are several drawbacks too.

Do you have a contract in hand, and want to go for an Umbrella Company? Well, it’s the good option provided you need to adhere to certain terms and conditions of the umbrella company service which is acceptable by you to work and get paid.

  • The five main steps to start working through umbrella company as:
  • Decide your umbrella company
  • Inform your agent
  • Sign paperwork contract
  • Furnish bank and tax details
  • Start contracting

Congratulations! You are one step ahead to work through an Umbrella Company as a contractor.

umbrella company vs limited company

What exactly an Umbrella Company is all about?

Umbrella companies act as a liaison between contractors, their employment agency and the end client.

Umbrella companies act as a liaison between contractors, their employment agency and the end client. Basically, Umbrella Company is a kind of agency which acts on behalf of contractors from various industries.

It is the umbrella company which engages with a lot of the administrative things, specifically in context to tax and payroll; when you’re an employee of the umbrella company. When your invoice or timesheet is paid by the end-client, it is the umbrella company which collects the income, deduct income tax and National Insurance Contributions(NIC) along with an administration fee, and afterward, paying the remaining amount.

What is an umbrella company
Understanding Umbrella

The Real Picture is:

Self-employed persons are the contractors who perform short or long-term periods of work for several companies instead of getting employed to a specific company. There are various instances when the companies or organizations refuse to work with self-employed persons (individually operating as contractors) but prefer invoices to be issued via a limited company. This is where umbrella companies come into the real picture.

It is the umbrella company which allows the self-employed persons (acting as contractors) to work for any chosen organization while the invoicing side would be taken care of by them on their behalf.

Earlier this was quite a simple solution to contractors but there are several pros and cons to be looked at while choosing to contract through Umbrella Company.

What is an umbrella company

Pros of Contracting through Umbrella Company

  • A simplified way of working as a contractor.
  • Reduces your administrative workload.
  • Since tax and NI are deducted at source and there would be no HMRC bills.
  • Easy to work on shorter-contracts with the organizations.
  • Good for contractors who have just started (i.e. temporary contractors who work for three months or less) or those who have not reached higher income tax limit.
  • Good for you if you are unsure whether contracting is for you, means you’re in between permanent jobs.
  • Someone else is doing your work.
  • Avoids the stress of running your own limited company that means not engaging in a costly affair of setting-up your own company and then dissolving it later on.
  • No need to be engaged with running software, payroll matters, VAT returns, company accounts, taxation, etc.
What is an umbrella company

Cons of Contracting through Umbrella Company

  • No tax efficiency
  • Must be dependent on the umbrella company for getting the payment of work.
  • Getting less home pay from Umbrella Company after deduction of commission, tax and NI contributions.

What is a Limited Company?

A limited company is a form of business structure that you set-up in order to run your business.

A limited company is a form of business structure that you set-up in order to run your business. Limited companies have their own legal identity which means they can own assets and are responsible for their own income and expenditures distinctive of their own. When a profit is generated by a limited company, it means it is owned by the company. As a limited company director, you will be an employee of your limited company wherein your company pays you a monthly salary.

What is an umbrella company

Contracting through Limited Company

A limited company is a form of business structure that you set-up in order to run your business.

A limited company is a distinct legal entity and you are employed by the company. First of all, a limited company is set-up and a business bank account is opened to obtain and make payments on behalf of the company. It is the director who determines how much they want to be paid in terms of salary or dividends. Dividend payments are considered to be the most tax-efficient method of getting income from the company because corporation tax payments are taken into consideration and a dividend tax credit is available which means those falling under 10% threshold won’t have to pay any dividend tax after corporation tax has been paid. There are many benefits, reliefs, and expenses which can also be claimed by the directors of limited companies.

What is an umbrella company
What is an umbrella company

Pros of Contracting through Limited Company

  • Great opportunities for tax planning and the ability to minimize tax bill.
  • Availability of maximum expenses, reliefs, and benefits.
  • Availability of flat rate VAT scheme.
  • You can control your own finances and there would be no intermediary handling.
  • No difficulty in running your own business; submit your spreadsheets to your accountant in the way you submit umbrella time-sheets and expenses.
  • Maximum tax advantages.
What is an umbrella company

Cons of Contracting through Limited Company

  • Disclosure of your company details to the class ="orange">Companies House which reduces your overall privacy.
  • Additional administration responsibilities along with completion of annual returns.
  • Contracting proves to be costly if you have plans to return to employment shortly afterwards.