Limited Company Services : Limited v Umbrella

Whether new to contracting or a seasoned pro, there are two options for creating a payment structure; either as a one person Limited Company or an Umbrella Company. Setting yourself up properly minimises your long-term tax liabilities, while maximising your income and allowing ease of dealing with your potential customers.

It is important to emphasise from the outset that the choice does not, in any way, influence the IR35 status of the contract or modus operandi of the working arrangements. The choice also wouldn’t influence any HMRC review or decision as to whether the contract falls within the regulations of IR35.

Setting up and running a limited company, where you become a director or shareholder, is the most tax efficient way of working and contains a series of advantages.

First off, in making a decision, the contractor should consider the following three points:

IR35 Status:
If your contracts are outside of IR35 then, from a tax point of view, the Limited Company would be the correct option - especially for long term contractors.

Presentation/Status:
Fancy calling yourself the Director? Then a Limited Company is the option for you.

Administration:
There is more work involved with a Limited Company, therefore it will require a little bit more of your time. If you are happy to commit 30 minutes a week to running administration of your businesses then select a Limited Company formation. If you are completely adverse to admin then an Umbrella is most suited to your requirements.

Making the right decision based on your own circumstances and requirements will achieve the most efficient result. There is no "always right" or "always wrong" solution. Both methods will work for you, achieving a similar result but with different working arrangements.

Advantages & Disadvantages of Limited v Umbrella Companies

Umbrella - Advantages Limited Company - Advantages
Perfect for first time contractors who require a quick and easy contracting start up. You are the Director of your own company.
Straightforward and easy to use, you simply update your timesheet and expense details then wait to be paid! Provides the most tax efficient way of working.
Ideal for short term contracts or contracts less than £25k per year. Allows claiming of a wider array of expenses.
Removes the legal implications and responsibilities of running your own Limited Company. Gives Access to the Flat Rate VAT scheme.
The PAYE umbrella company takes care of all accountancy, administration, taxation and communicating for payment of invoices. You keep complete control of your financial affairs. You do not have to risk your money with any third party administrator.
All tax and NI is deducted before you receive your money. Therefore you will have no further taxes to pay. Running your own business isn't difficult; simply submit spreadsheets to your accountant - time sheets and expenses.
Insurance policies are included as part of the service Great opportunity for tax planning.
Perfect if unsure about staying in the contracting market. Ideal for contractors with complex financial affairs.
The threat of IR35 is removed. Wider ranges of tax benefits are available. This includes payment by dividends, which attract a lower rate of tax.
You have full employee status and entitlement to all statutory employment rights. You are your own boss! You’ll have complete control over the company and its operations.

 

Umbrella - Disadvantages Limited Company - Disadvantages
You will receive a salary that is subject to full PAYE Tax and National Insurance - it's just like being a permanent member of staff again. Can be costly if you contract for a very short period of time. Not ideal for contracts under £25k per annum.
You are reliant on the umbrella company to collect your money from the client or agent and then to pass it on to you. There is a certain amount of paperwork involved.
  As director of your own company, you will need to keep Companies House informed of all your company’s dealings.

Why Choose EAFS?

  • We are Payroll Experts: We have major experience in Europe and hold all necessary licences for distributing payroll across the EU.
  • Value for Money: Our fees are highly competitive and very reasonable, especially compared to other firms.
  • We are on top of the Latest EU Developments: The legislation for the European Union is constantly changing, we stay up to date with all developments to provide the most legally compliant service at a competitive price.