Choosing Between a Limited Company and an Umbrella Company – What’s the Wisest Choice?

If you’re considering ditching permanent employment and moving towards freelancing and or contracting there are a few things that are really worth taking into consideration. You have to analyze your options and usually, there are two main choices involved: setting your own limited company and working via an umbrella payroll service. As there are pros and cons to each of the solutions, it’s best to learn a thing or two about them in order to be able to make an informed decision to best suit your needs.

What’s an umbrella company?

An umbrella company is similar to an employer to agency contractors. It provides full employment rights to contractors, and these include holiday pay, sick pay and more.

Advantages of an umbrella company

  • You will be able to enhance your take-home pay by reducing income tax, and you can also claim your business expenses that result in maximum take-home pay.
  • Such an option allows more time for finishing the contract by handling all the admin work, and this means that you will be able to focus on your work without the hassle of dealing with taxes and invoices.
  • This is the ideal option for contractors who come under the IR35 tax. An umbrella company such as will provide employment cover and this way it will help contractors under the tax mentioned above make the most of their status.

Downsides of an umbrella company

  • You will not be able to enjoy the independence that you would have if you had your very own limited company simply because you’re not the director.
  • Umbrella services provider will make you remain with them for a certain period of time.
  • They can also charge you a great deal of money for their services, and this means that you will end up paying more compared to a limited company.

What is a limited company?

A limited company makes you the only owner of that firm, and you will take full responsibility for financial matters. You can maintain the accounts by yourself, or you can hire an accountant. You’ll also have complete control over your money.

Advantages of a limited company

  • You will enjoy the full independence of making your own policies and save as much tax as you can.
  • You will save more tax compared to an umbrella company because you will have full control over the business policies and other affairs and you can opt for tax efficiency.
  • You will have full freedom over the financial matters, and you’ll get to enjoy increased income.
  • The risk of losing your money is null because you will get the payment directly.

Downsides of a limited company

  • If you decide to set up a limited company, you’ll need a lot of time and resources. There’s a procedure that you will have to follow for incorporating your company because it is a legal person. New rights will get created, and you’ll have lots of duties and liabilities as the director.
  • You’ll need extra time to finish the admin work, and you’ll have to deal with taxes and invoices among others.
  • If you come under the IR35 tax, you will not be able to take any advantages of setting a limited company, and you’ll have to pay more taxes compared to an umbrella company.
  • You will probably have to hire some people especially an accountant, and this will trigger even more costs that could even surpass the fee that you would have to give to an umbrella company.

Closing words

Keeping all these in mind, consider all advantages and cons for each option and choose what suits your needs best.

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