Limited Company vs PAYE Umbrella Company

Working as a self-employed professional is a big decision and there are a number of working options. If you’re choosing between joining an umbrella company or setting up your own limited company, there’s much to consider; ultimately, it’s a question of balancing the responsibility you’re prepared to take with how much of your earnings you want to keep. So which is the better option?

Limited Vs Umbrella

It’s safe to say that this is the area where contractors really can reap the rewards of working through a limited company of their own.

Umbrella companies take much of the effort out of working, but to do so they also take a cut of the payment generated by your services. In practice, this means that the average umbrella contractor can expect to take home somewhere between 67 and 76 percent of the value of their contract. In contrast, the tax efficiencies on offer when working as a limited company contractor means you can keep anything from 81 to 86 per cent.

Incorporating your limited company is a relatively simple process – you need to submit basic details to Companies House such as the company’s name, address, directors and ‘articles of association’, which are rules for how the company will be run. Model articles are available free to use from Companies House. Alternatively, you can use a company formation agent who will take care of much of the administration for you.

With an umbrella company, the process is even less complicated, because you simply become an employee of the provider. Beyond your contract of employment with the company, there will be very little else you need to do.

Joining an umbrella company puts you back into the pay as you earn (PAYE) system which is used by any employee. Some expenses can be claimed back against your tax liability, but ultimately this is as far as the benefits go.

There’s no doubt that operating as a limited company is the most tax efficient way of working open to you. As director and shareholder, you can claim back a much wider range of expenses. For example, legitimate expenses claims can cover accountancy fees, software and even equipment – provided it is solely used for work purposes. There is also the flat rate VAT system, which means you get to retain some of the VAT you receive.

There’s a common belief that running your own company is complex and time-consuming. But there may well be less to it than you might have expected – especially if you hire the services of a reputable accountant whose fees are tax deductible. Nevertheless, you do have sole responsibility for the administration of your business, which means that you will have to shoulder some bureaucracy. Still, don’t forget that there are plenty of service providers out there who can lighten some of the load and deal with some of your day-to-day tasks.

On the other hand, beyond the regular tasks of finding your assignments and reviewing your employment contract, joining an umbrella company will mean far less is expected of you.

On the other side of the coin, limited company contractors enjoy total control alongside their responsibilities. You’re in charge of your own tax and financial affairs, which means that you have plenty of scope to adapt and develop your business as your circumstances change. It also means you’re the first person to know if anything goes wrong and you can get it fixed.

Working as an umbrella contractor might mean less paperwork, but it also means that your livelihood is in someone else’s hands. They’re responsible for making sure you get paid and taxed correctly, as well as dealing with statutory payments like sick pay and maternity leave. You might find that you prefer having the final say in your financial affairs.

Limited Company

Setting up a Limited Company involves incorporating your company, setting up a business bank account, arranging insurance cover, and becoming a director of your company amongst other things. 

For more details about Brookson's Limited Company Service, click here.

Umbrella Solution

Umbrella company working means that you become an employee of an Umbrella Company, allowing you to work on a series of assignments without the responsibilities of running your own company.

For more details about Brookson's Umbrella Solution, click here.

 

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If you would like to understand more about your working options and how they affect you financially and the levels of day-to-day responsibility then you will find our free, no obligation consultation and take home pay illustration really helpful.

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