Limited vs Umbrella

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When you start contracting, one of the first things that you’ll need to think about is whether you should operate as limited or umbrella. As with everything, there are advantages and disadvantages to both options.

In the following paragraphs, we will break down the key elements of both options to provide you with a more transparent view so that you can make a more informed decision about whether you should be limited or umbrella.

Limited company

As any contractor accountant will tell you, the most tax efficient way of trading is to work through a limited company. Typically, you can retain 75% to 80% of your gross income and there are a wide range of tax saving benefits that you can take advantage of.

When you take this into account, it’s no surprise that many contractors opt to operate through a limited company.

Another key advantage of working through a limited company is the limited liability status that you will receive. In a nutshell, this means that should your company be unable to keep up with its debt repayments, you aren’t personally liable.

However, the limited company route isn’t right for everyone. As a general rule of thumb, it isn’t recommended if you make less than £25,000 per annum, because you won’t be able to capitalise on all the tax saving opportunities that are available.

Limited companies come with a little bit of extra paperwork each month but this shouldn’t amount to more than 15 minutes or so and if you hire a good contractor accountant they will be able to bear much of the burden for you and ensure that your administrative duties are as pain free as possible.

Umbrella Company Employment

Umbrella companies work differently to limited companies. You’ll work as a contractor, but you’ll be employed by the umbrella company.

The umbrella company will invoice the client for the work you complete as their employee, they’ll cover their costs from the money they receive for your work and they’ll pay you as a standard PAYE employee. All tax and NI will be deducted before you are paid.

As the umbrella company is your employer, they’re responsible for paying you statutory payments like sick pay and maternity/paternity pay, they’ll have to offer a workplace pension and must provide you with holiday pay. These costs are often recovered from the amount the umbrella is paid for your work, along with employers’ national insurance and their profit margin, so make sure you receive a comprehensive pay illustration, including all deductions, before you sign up.

If you only plan to be contracting for a short period, the umbrella company route is often ideal, as you won’t have to worry about setting up a limited company and paying the fees to do so.

The most obvious drawback of the umbrella route is the difference in take home pay. If you choose to contract through an umbrella company, you can expect to take home around 60% to 65% of the gross invoice value.

A word of warning

There is no legitimate way for an umbrella company to pay you a take-home figure of more than 60% – 65% of the invoice value, but not every company using the name “umbrella company” is legitimate. If you are quoted a higher take-home figure, the umbrella is almost certainly using an aggressive tax avoidance scheme, which will ultimately cost you money and cause you serious problems.

Setting up a limited company isn’t as difficult as you may imagine, the easiest path is to give Integro a call and talk through your plans and your options; so if you’d like some free advice before setting up your limited company you can give us a call on 01525 303984.

What expenses could you claim through a Limited Company?

Travel

As a contractor working at a client company location you can claim the mileage of the travel from your home at 45p per mile for the first 10,000 and thereafter 25p per mile. This expense includes the running and maintenance costs of your vehicle as well as the cost of fuel.

Accommodation

Hotel costs and any meals in conjunction with an overnight stay can be claimed as an expense. While there are no set allowances for this expense, it must be deemed “reasonable”.

There are many more expenses you can claim through your limited company and a more detailed explanation can be found on our Claiming Expenses page.

Work/Life Balance

As a limited company contractor, one of the many benefits is that you can control your work/life balance, which seems to be an important factor when considering a contracting lifestyle. While there can be more responsibility when working through a limited company, compared to an umbrella company for example, you are in complete control.

Being a contractor means that your end client does not determine, when, where and how you work to complete your contract. So if you choose to do so, you could work from home or only work a certain amount during one particular week; but this does however need to be determined within your contract.

Personal Security

Unlike other ways of working for yourself, operating through your own limited company means that your personal assets won’t be affected, should the limited company have debts; your personal assets are not at risk when working through a limited company.

This however is not the case in many other ways of working for yourself, by operating through a limited company and your personal assets are not at risk.

Credibility

As a limited company contractor, there comes a certain assumption that you and your company provide a sense of confidence when looking for contract work; and some companies prefer to work with limited company contractors over other self employed workers.

Being in Control

Becoming a contractor and doing so through a limited company means that you are in the driving seat, and you are in control. You can take holidays and breaks from contracting whenever you like even for further education or courses to strengthen your CV. You have complete control and flexibility of your work life balance, which is one of the best advantages to becoming a contractor.

Overall, if you’re considering a contracting lifestyle, even if you are just dipping your toe in the water and you could actually find yourself contracting for longer than you expected, setting up a limited company is the best way to being working for yourself and becoming your own boss.

Before you make your choice

There are many variables which might affect your decision, and some of those are personal to you. For example, how long do you expect to be contracting? How much administration are you comfortable with? Is it more important that you have control of your finances, or that you get paid when you’re sick?

Before you decide, it’s advisable to seek the advice of a good contractor accountant who will take your personal circumstances into account and advise you on the best route for you. Why not give us a call on 01525 303984 or contact Christian@integroaccounting.com for more information.

Why Integro Accounting?

Integro Accounting is the UK’s only specialist provider of fixed fee, limited company accountancy services for contractors, consultants and freelancers that was established to an award winning standard – our Practice Manager, Maria Hickmott FCCA, won The British Accountancy Awards’ ‘Accountant of the Year’ in 2011.

We were set up with the vision of providing a service that is the ultimate for the dynamic, busy professional of today in a language you understand.

Integro Accounting have designed a bespoke service for the contractor who is always on the go; never forgetting that one size will never fit all.

The relationship you have with your accountant is the most important factor in our service which is why we will always offer unlimited contact with your own personal accountant; whether that contact is via the phone, email or face to face.

We have our 3 offices located in London, the South-West and on the Bedfordshire and Buckinghamshire border. There are also meeting locations in many of the major cities and towns across the Home counties, South-West and South Wales, all conveniently placed so that you never have to travel far to meet your accountant.

If you have any questions about contracting or would like to find out more about how Integro Accounting can help you and business please call Christian on 01525 303984, email christian@integroaccounting.com or request a callback.