Choosing Between a Limited Company and Umbrella Company in the UK
Choosing Between a Limited Company and Umbrella Company in the UK
Whether you're brand new to contracting or you've been building yourself up for a while, there will come a time when you need to choose between a limited company and an umbrella company. Though these are both ways to approach contracting, they're very different and knowing what sets them apart is key to choosing the right one for you.
At
Go Limited, we know that you want to get things right, which is why we're here to help you make the right decision. Whether you're thinking about setting up a limited company or you're debating simplifying things with an umbrella company, we're here to help.
Umbrella Company vs. Limited Company UK: Key Differences
There are a few different ways to approach contracting in the UK, and most contractors choose between working with an umbrella company, or setting up their own limited company. There are benefits to both approaches, and the right choice for you will come down to what you want out of your career in the long run. One approach sees you as a business owner, someone who's in control of their business and contracting. The other approach takes away the responsibility of being a business owner, ensuring your tax and compliance are handled by someone else.
Contracting via an Umbrella Company
When you work through an umbrella company, you effectively become their employee, and this means that you're paid as an employee for tax purposes. They deduct income tax and National Insurance contributions (NICs) on your behalf, and then they pay you a salary. You don't have to worry about managing your finances, dealing with HMRC, keeping money aside for your tax bill or submitting accounts. When you work with an umbrella company, they take care of it all. When you consider the simplicity, it's easy to see why many contractors consider working under an umbrella company. However, you do have to pay for the services of an umbrella company, and this can take a chunk out of your profits. You also may miss out on the potential benefits of tax efficiency, that would have been available to you, should you choose a limited company option.
Being a Limited Company Contractor
If working with
an umbrella company doesn't appeal to you, you can choose to set up your own limited company for contracting. This makes you the owner, director and shareholder of your business, giving you full control over how you manage your income, taxes and expenses. It also gives you the option to adopt a more tax-efficient structure, where you
pay yourself a combination of salary and dividends. This lowers your taxable profits, keeping more money within the business. Of course, setting up a limited company does come with administrative responsibilities, such as filing annual accounts and keeping proper records. For many contractors, this is outweighed by the control it gives you over your money.
Things to Consider When You Compare an Umbrella and Limited Company
When you're deciding between an umbrella company and a limited company, there are a few key things to consider.
Contract Length
If you're on a short-term project, and a lot of your contracts are short-term, you might decide that you don't want to deal with admin, in which case an umbrella company might suit you for the time being. However, if you're earning a decent day rate and plan to continue contracting for a while, the financial advantages of a limited company will usually outweigh the administrative responsibility. Working through a limited company tends to be the better option for long-term, career contractors who want to take their business to the next level.
IR35 Legislation
IR35 status is another key factor to consider when you're comparing umbrella vs limited companies. If your contract is inside IR35 - this means that HMRC considers you an employee for tax purposes, rather than a genuine business - then working through a limited company offers fewer benefits, as you'll have to pay tax and NICs similar to an employee anyway. If this is the case, the simplicity of an umbrella might be more appealing. But, if you are a genuine contractor and you work outside IR35, setting up a limited company gives you access to the full range of tax benefits and a lot more financial control.
Fondness for Admin
Your affinity for administrative tasks matters because establishing a limited company for UK contracting requires more paperwork compared to operating through an existing limited company. A contractor operating through a limited company must prepare annual accounts and tax returns along with VAT administration if they maintain registration. Most contractors discover managing their limited company work manageable when they partner with a skilled limited company accountant.
Long-Term Professional Goals
It's important to consider your long-term professional goals when you're deciding whether to set up a limited company for contracting, or to join an umbrella company. If you plan to contract for a few years or more, building your own limited company gives you the opportunity to retain profits, invest in your business and even build up your savings in a tax-efficient way. That's not possible with an umbrella, and you're likely to find that your take-home pay is lower, and you don't have the chance to grow your business in the same way.
Take-Home Pay: Umbrella vs. Limited Company
Perhaps the biggest factor for most contractors is take-home pay, and this is where the difference becomes the most noticeable. When you work through an umbrella company, your earnings are processed like a standard salary through PAYE. You'll pay income tax and employee NICs, just like a regular employee. Plus, you'll also have to pay for the services of the umbrella company, which further reduces your income.
With a limited company, you can pay yourself in a more tax-efficient way. Most limited company contractors take a low salary and then pay the rest of their income in dividends, which are taxed at lower rates than salary. You can also retain profits in your company and choose when to withdraw them, giving you more control over your cash flow and tax planning. Setting up a limited company for contracting also means being able to claim a wide range of business expenses to reduce your tax bill, which umbrella company contractors aren't able to claim.
Is Limited Company Take-Home Pay Higher?
Yes, limited company take-home pay does tend to be considerably higher than when you work through an umbrella company. The ability to split your income between salary and dividends, and to claim legitimate business expenses, gives limited company contractors a tax advantage. You can also take advantage of things like the flat rate VAT scheme. Even after accounting for accountancy fees and occasional admin time, the savings usually far outweigh the costs.
The Benefits of Setting Up Your Own Limited Company
Beyond the higher limited company take-home pay, there are several other reasons contractors choose to set up a limited company. Firstly, there's the professional credibility factor. Many clients prefer to work with limited companies, as it presents a more businesslike, professional image. It shows that you're committed to operating as a genuine contractor, and you're dedicated to providing a professional, ongoing service.
There's also a lot of financial flexibility that comes with setting up your own limited company. You can retain profits in your business, reinvest in equipment or training, or time your dividend withdrawals for tax efficiency. You can also make tax-efficient pension contributions directly from your company, which can reduce corporation tax and help you plan for the future. You also gain the ability to claim a wide range of business expenses, including equipment, travel, software, insurance, and more, further reducing your taxable income.
There's also the benefit that owning your own limited company gives you full control over your business decisions. You choose how much to pay yourself, when to invoice, which contracts to take on, and how to grow your business over time.
Umbrella vs Limited: When an Umbrella Company is Likely to Come Out On Top?
Although operating as a limited company tends to provide greater financial benefits, certain circumstances make umbrella companies a more suitable choice. People on very short-term contracts or those filling breaks between permanent positions may find the fast and uncomplicated process of joining an umbrella company attractive. New contractors who want to explore contracting before opening their own limited company should consider umbrella companies. Contractors who stay in their field will discover that working through an umbrella company limits their options and raises costs.
Choosing between an umbrella and a limited company is one of the first big decisions you'll face as a contractor, but
Go Limited is here to help. While an umbrella can offer convenience and speed, the limited company route is often the smarter long-term choice. Not only can it significantly boost your limited company take-home pay, but it also gives you control, flexibility and the opportunity to build something that supports your long-term career goals.
FAQs: Choosing Between a Limited Company and Umbrella Company in the UK
1. What's the main difference between a limited company and an umbrella company?
The biggest difference is in how you work and get paid.
- With a limited company, you're effectively running your own business. You take care of invoicing, taxes, and accounts – or pay an accountant to help.
- With an umbrella company, you're technically their employee. They handle all the admin, tax, and payroll, and simply pay you a salary.
2. Which one is more tax-efficient?
Alimited company is usually more tax-efficient – especially if you're outside IR35 and earning a decent day rate. You can split your income between salary and dividends, and claim a wider range of expenses.
With an umbrella, everything is taxed as salary under PAYE, so your take-home pay is generally lower. But it's a lot simpler to manage.
3. What is IR35 and why does it matter?
IR35 is a tax legislation designed to catch people who are working like employees but using a limited company to pay less tax.
1. If you're inside IR35, you'll be taxed like an employee – so a limited company offers fewer benefits.
2. If you're outside IR35, a limited company can still be the most tax-efficient choice.
This rule can have a big impact on which setup is better for you.
4. Is an umbrella company easier to use?
Yes, it's the hassle-free option. You simply submit your timesheets, and they handle your payments. There's no need to worry about tax returns, company accounts, or administrative tasks. It's an ideal choice if you're new to contracting or just want to keep things straightforward.
5. What admin is involved with a limited company?
Quite a bit – but manageable, especially with an accountant. You'll need to:
1. Raise invoices
2. File annual accounts and tax returns
3. Run payroll (for yourself)
4. Pay corporation tax and possibly VAT
5. It gives you more control, but there's definitely more paperwork.
6. Can I claim expenses with both?
Yes, but there are differences.
1. Limited companies can claim more – including equipment, travel, software, and some training.
2. Umbrella companies are more restricted. You can usually only claim certain expenses, and only if you're not under supervision, direction or control (SDC) – which most people are.
7. How much will I take home under each model?
If you're outside IR35 and earning £300+ a day, you'll usually take home more through a limited company – even after accounting fees.
With an umbrella, your income is taxed like a regular salary, so your net pay is lower. That said, it's all handled for you, so you're paying for convenience.
8. Which is better for long-term contracts?
For long-term, well-paid contracts (especially if you're outside IR35), a limited company usually makes more sense financially.
If your contract is short-term, inside IR35, or you just don't want the admin, an umbrella company is the easier choice.
9. Are there any hidden costs with umbrella companies?
Some, yes. Most umbrellas charge a weekly or monthly fee (often around £20–£35). Some also pass on employer's National Insurance and the Apprenticeship Levy by deducting them from your rate – so you might earn less than expected.
Always ask for a full take-home pay illustration to see the true picture.
10. Can I switch between the two?
Yes – and many contractors do. You might use an umbrella for a few months inside IR35, then switch back to your limited company when the right contract comes along. Just make sure to keep your records tidy and don't miss any legal or tax deadlines when switching.
11. Will having a limited company make it harder to get a mortgage?
Not necessarily. You might need to show extra documents – like company accounts or contracts – but there are plenty of mortgage brokers who specialise in helping contractors and limited company directors. It's doable, just takes a bit more prep.
12. How do I know which is right for me?
Ask yourself:
1. Am Iinside or outside IR35?
2. Do I want to maximise my take-home pay or keep things simple?
3. Am I happy to manage a company (or pay someone to)?
4. How long is my contract and how much am I earning?
If you're not sure, it's worth speaking to an accountant or tax adviser who works with contractors. They can walk you through the pros and cons based on your personal situation.
Important:
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.
