Every contractor should know the key differences between an umbrella company and a limited company. After all, the choice you make between umbrella vs limited will have a big impact on your contracting career.
In this guide Umbrella Broker takes a closer look at umbrella company vs limited company, outlining the key differences between both, so you can make the right decision for you.
What is an umbrella company?
First, let’s look more at what an umbrella company is.
An umbrella company becomes the employer of the contractor and in turn puts them on their company payroll.
Although the contractor becomes the company’s employee, they still maintain the freedom to choose what work they take on and which clients they work with.
What is a limited company?
On the other hand, a contractor must set up their own limited company. Here, the contractor operates on a self-employed basis and must become a director of their own limited company.
Limited company contractors must also source and secure their own contract work.
That’s the main difference between how an umbrella company and a limited company are set up and run and how this impacts the contractor.
So, what are the other key differences between the two?`
Tax
One main difference between umbrella company vs limited company is how the contractor will pay tax.
Umbrella company contractors pay tax through the PAYE system.
Here, the contractor inputs their timesheet to the umbrella company which will then collect the fee from the client and processes it through the PAYE tax system which is the most common way of paying tax in the UK.
Once the correct levels of tax and National Insurance have been deducted, the remaining amount is then transferred to the contractor.
This means that the contractor is always up to date with the tax and NI they owe.
Limited company contractors are off-payroll workers on the other hand.
Here, the limited company contractor will collect their fee directly from the client. They must set aside enough of the fee to cover their tax and National Insurance bill when they carry out their self-assessment tax return which they are responsible for working out and inputting themselves.
So, whereas umbrella company contractor’s tax obligations are taken care of, limited company contractors have to deal with tax themselves. This can often be difficult which is why many limited contractors end up paying for an accountant to help them.
Statutory payments
Another difference between umbrella company vs limited company is statutory payments.
As employees of their chosen umbrella companies, umbrella contractors are automatically entitled to statutory benefits meaning they will get paid when they are off work due to illness, holiday or maternity or paternity leave.
This means that these contractors will receive 28 days’ holiday pay each year (worked out pro rata for part-time contractors,) as well as 28 weeks paid holiday leave.
On the other hand, limited company contractors are not entitled to such statutory rights. This is because they are not employees, meaning should they have to take time off the contract due to illness or holiday, they will not be paid for the time taken off.
IR35
Every contractor will have heard of infamous IR35 legislation.
Well, the good news for umbrella company contractors is that as employees they are totally exempt from IR35, meaning they don’t have to worry about getting caught out by it.
Limited company contractors, on the other hand, are not, meaning IR35 is a real threat for these workers.
IR35 legislation was introduced to stop self-employed workers like contractors from taking advantage of tax and National insurance benefits whilst actually operating more like an employee.
What’s more, recent reforms to IR35 have extended the legislation to the private sector and have meant that thousands of limited company contractors are at risk of getting caught out. This could mean they face hefty fines and penalties as well as stressful investigations.
These reforms will lead to thousands of self-employed contractors from being wrongly classified and in turn paying more in tax than they need to without receiving the benefits that employees do.
Time
The final key difference between umbrella company vs limited company is the time and energy taken with each.
Umbrella companies are widely considered an easy way of contracting. After all, they take care of a range of tasks for the contractor, including:
- Processing expenses
- Submitting timesheets to the client
- Invoicing the client
- Chasing late invoice payments
- Collecting the fee from the client
- Processing the contractor’s tax and NI and paying this to HMRC
- Paying the contractor’s salary
- Organising insurance for the contractor
- Organising holiday pay and sick pay
- Paperwork and admin
In other words, the umbrella company takes care of many of the tricky and time-consuming tasks that contractors have to deal with.
Limited company contractors, on the other hand, must deal with all these tasks themselves. As we have discussed, this can take them a lot of extra time and energy.
Ready to go Umbrella? Umbrella Broker can help
Having established the key differences between umbrella company and limited company, if you have decided to join the thousands of fellow umbrella company contractors, we are here to help.
