Umbrella Companies Vs. Limited Companies

19 July 2018

If you’re thinking about starting out as a contractor, then you will be faced with a tough decision. Should you go with an umbrella company, or start your own limited company?

Naturally, the answer will depend on your individual circumstances. That’s why, in this article, the maple team will explain which option might be right for you and why, if you earn more than £30,000 a year in fees, going limited is nearly always the better option.


What is an umbrella company?

A PAYE umbrella company is a company that acts as a contractor’s “employer”. This means that the contractor would receive a contract of employment along with all of the benefits of being in statutory employment (such as maternity leave, sick pay, and so on).

The contracts on which you’ll work are canvassed for and secured by the umbrella company. An umbrella company provides payroll services to contractors. This includes timesheet logging, invoicing, payment of salaries, and the payment of taxes.


What are the benefits of an umbrella company?

Contractors who use umbrella companies don’t need to worry about any of the stress that paperwork and administrative duties entail. When we speak with newer contractors, this is one of the biggest draws to them because it leaves them more time to either work or to take time out for themselves.


Advantages of an umbrella company


Umbrella companies also offer contractors a steadier stream of work compared with a limited company contractor who has to seek out the work themselves. This sort of stability usually is only guaranteed through either continuous employment or an umbrella company.

You can also reclaim any of the legitimate business costs that you incur as a contractor when you are a part of an umbrella company. However, the list of items of expenditure on which an umbrella contractor can make a claim is diminishing all the time.


What are the benefits of a limited company?

First, you get to keep more of what they earn. An umbrella company will take a portion of your earnings to pay for their services. This is a typical trade-off – you pay the umbrella company for the security and simplicity that they provide, however, you won’t get paid as much. A contractor using an umbrella can expect to take home around 65% of their earnings whereas, with a limited company, a contractor can keep up to 85%.

There is additional paperwork – you will be filing for yourself and your company. By using an experienced limited company contractor accountancy firm together with online bookkeeping software, you update once a week, the majority of the paperwork you’ll need to complete will be handled by your accountant.


Which is right for your business?

Each contractor has different needs germane to their own situation, but there are some general rules of thumb that you might want to consider following.

For instance, if you are a contractor earning over £30,000 a year, then owning your own limited company is, in most cases and in our experience, the better option for you. It is the most tax efficient option of the two. With the help of a professional accountant, you will spend little time on paperwork, you won’t have to pay umbrella company’s fees, and you keep much more of what you earn.


Which is the right option for your business?


If you are starting out as a contractor and you’re looking for the security that traditional employment offers, then an umbrella company might be the best choice. This will give you a good opportunity to build up your network of contacts as well as your portfolio should you decide to form your own limited company in the future.


We can help

If you’re new to contracting or you’re currently with an umbrella company, and you want to know if it makes financial sense to make the switch, let us work a few examples for you to show you how much of your earnings you’d keep with both choices.

Get in touching, using this form or give us a call on 01332 207336.

Maple Accountancy is a firm of expert Business Advisors offering accountancy services, tax and business advice to owner-managed and family-owned businesses.

All clients are individual, and we tailor our service to your needs. Use the site to find out what makes us different and understand why you should appoint us.


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