Is it better to be an umbrella or a limited company? - CloudCo Accountants

Is it better to be an umbrella or a limited company?

Umbrella company vs limited company

Are you also a freelancer or a contractor in the UK, and are you wondering if an umbrella or limited company could be the right fit for your own business? Choosing the wrong company structure can impact your take-home pay, workload, and even your legal liabilities. Both options come with their own benefits and challenges, including tax efficiency, administrative responsibilities, and overall control over your business.

A limited company can be more tax-efficient than an umbrella company contractor, especially for higher revenue businesses, due to potential savings on corporation tax, the ability to claim a broader range of expenses, and opportunities for profit distribution through dividends.

This in-depth blog will help you understand each business structure’s advantages and disadvantages, empowering you to make strategic business structure decisions that align with your personal and financial business needs.

What is the difference between an umbrella company and a limited company?

Umbrella Company: The umbrella employment company can be considered a third-party entity as it hires contractors to work on temporary assignments. The umbrella company manages payroll income tax and national insurance contributions, a simple set-up with a small administrative burden on the end client.

Contractors who sign a full employment contract with an Umbrella firm are eligible for all statutory employment benefits, including Statutory Maternity and Paternity Pay (SMP/SPP), Statutory Sick Pay (SSP), a pension system, and holiday pay. Many other umbrella companies and contractor firms provide additional job advantages that are not needed by law, such as insurance, private medical coverage, access to counselling and welfare services, and reward and perk packages.

Contractors usually submit the timesheet of contract work to the umbrella company and invoice the clients for the completed work. After all the deductions for tax, National Insurance, and the Umbrella umbrella company contractor’s fee, the contractor receives their Net Pay amount. Some umbrella companies even provide contractors benefits like holidays, sick leave, and peace of mind.

Limited Company: A limited company is a separate legal entity registered with Company House. Contractors who operate through their limited companies become directors.

They give them complete control of their business operations, financial management and tax planning. After registering with a limited company, they can invoice clients directly and claim their business expenses, which gives them complete control of their business operations, financial management, and tax planning. After registering with a limited company, contractors can also benefit from tax planning opportunities such as drawing dividends in addition to their salaries.

Forming a Limited company and registering it with Companies House involves a minimal charge and various reporting requirements. Annual accounts and other administrative documentation must be submitted annually. Additional deadlines for paying Corporation Tax are now charged at 25% of a company’s profits after deducting all expenses.

Umbrella company vs limited company- which is best for me?

Here are some of the benefits and drawbacks of an umbrella company and a limited company:

Benefits of operating as an umbrella company

  •  The umbrella company manages payroll, taxes, and compliance, which reduces administrative strain.
  •  If you are a contractor, operating through an umbrella firm gives you access to clients and jobs you would not otherwise have. There is less paperwork involved than with limited business contractors.
  • You don’t have to bother completing a self-assessment or keeping records because the umbrella company handles all your tax deductions, national insurance, and holiday pay.
  •  Contractors receive employee benefits such as vacation pay, sick pay, and pension contributions.
  •  Easy setup with minimum documentation, allowing contractors to begin work right away.

Drawbacks of operating as an umbrella company

  • Higher tax deductions and umbrella company fees lower net income.
  • Contractors have less influence over how their earnings are handled and taxed.
  • You have fewer options for claiming business expenses than a limited corporation.
  • The umbrella company is unregulated. Make sure to employ only reliable services.

Benefits of operating as a limited company

  • Operating as a limited business can boost reputation and attract more valuable clients.
  • The single most significant advantage is limited liability, which means that if the company goes bankrupt or experiences financial difficulties, the assets of the owners and shareholders are treated as separate and cannot be harmed.
  • A limited liability company’s professional standing may be more enticing to other firms wishing to contract services, enhancing its possibilities for development and sustainability through a more substantial reputation.
  • A limited business can benefit from superior tax efficiency and planning than a solo trader or a corporation without LLC status. Individual owners can lower their personal tax liability by combining wage payments with dividends.

Drawbacks of operating as a limited company

  • One of the most significant disadvantages for businesses is that the paperwork for a limited company is more complex. It must file or register with Companies House and fulfil specific laws and regulations.
  • Directors have several statutory tasks and duties. There are additional administrative expenditures compared to the umbrella (for example, accounting). All directors must submit an annual self-assessment return. It may not be appropriate for short-term contracts.
  • LLCs must file accounts with Companies House and be more open and transparent about how they operate. Tight protocols for withdrawing funds from the business and the structure of the limited company also exist.

Is an umbrella or limited company more tax-efficient?

A limited corporation is generally more tax-efficient for many contractors, particularly for higher-income contractors. This is owing to lower overall tax rates, the flexibility to claim a wider variety of business expenses and the possibility of distributing profits as dividends.

However, weighing these advantages against the higher administrative, financial obligations, and legal constraints of operating a limited business is critical.

Can I switch from an umbrella company to a limited company?

Yes, it is feasible to move from an umbrella company to a limited business. The steps include forming a limited company, registering for corporation tax, opening a business bank account, and managing payroll and yearly accounting.

Consulting with a qualified contractor accountant can help you achieve a smooth and compliant transition and maximise the tax benefits of your new business structure.

Need more advice? Get in touch with Cloudco Group today

Selecting between an umbrella company and a limited corporation might be difficult. Cloudco Group offers personalised counsel and experienced advice geared to your specific scenario. Our team is ready to assist you in making the right decision for your business needs. Contact us today to learn more.

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CloudCo Group is a Chartered Management Accountancy Firm offering premium accounting services to a range of businesses and individuals.

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