Limited company vs. umbrella company

The vast majority of contractors work via their own limited companies, or via an umbrella company scheme. In this guide, we look at the pros and cons of each business structure.

Limited Company

Working via a limited company is the most tax efficient route to take. By taking a small salary, and drawing down most of your income in the form of dividends, you can minimise your exposure to income tax and NICs.
Your have a contractual agreement between your limited company and recruitment agency to provide services, or you contract directly with the end-client.
As a limited company director, you are responsible for ensuring you meet your statutory and legal obligations. You must submit accurate records on time, and keep Companies House informed of any changes to your company.
Although limited company contractors will need to hire an accountant, they are ultimately responsible for ensuring that their tax returns are accurate.
As a limited company contractor, you will have access to the Flat Rate Vat Scheme, which can provide further savings should you join.
You are in charge of your own affairs, and may also wish to run other part-time businesses through your limited company.
If you are caught by IR35, there are still some benefits to working via a limited company, but the tax benefits are vastly reduced.
In reality, with a good accountant, the actual time you spend on company administration is low, and the tax benefits greatly outweigh any inconvenience you may have tending to company administration.

Umbrella Company

If you join an umbrella scheme, you become an employee, and contracts are signed between the umbrella company (itself a limited company), and the end client.
You have very little paperwork to concern yourself with, and don’t need to hire an accountant at all.
You will not benefit from the tax savings afforded by a limited company. You will receive a salary, net of expenses, income tax and National Insurance Contributions (NICs).
Each period, you forward your timesheet and expense claim to your umbrella company, and the umbrella scheme will do the rest.
This is a hassle free route of contracting, and may also be a useful structure if you are working on a one-off short-term contract.
If you are caught by IR35, the umbrella company route may be ideal, as the reduced benefits of running a limited company may not seem worth it.