Go Limited - Comparison of Working Through a Limited Company Versus Umbrella Company in the UK
Go Limited - Comparison of Working Through a Limited Company Versus Umbrella Company in the UK
So, you’ve decided to give contracting a go. You might have been a full-time employee previously, or maybe you’re trying out a new career with a new approach. Whatever your reason for choosing contracting, you have a big decision to make - will you contract via an umbrella company, or will you set up a limited company of your own? There are pros and cons to each, and comparing the two options will ensure you choose the ideal approach for you.
At Go Limited, we know that deciding between limited company contracting and umbrella company contracting is a big decision, and it’s not one to take lightly. That’s why we’ve compared the two options, helping you to weigh up the benefits and successfully plan your contracting journey.
Limited Company vs. Umbrella Company
Before you decide between limited company contracting and umbrella company contracting, you need to know what they both are. Though there are some similarities, they’re not the same thing by any means.
What’s a Limited Company?
A limited company is a business structure you register with Companies House, turning you into a business owner. As a contractor, you can set yourself up as the director and shareholder of your limited company, giving you full control over how you operate and pay yourself. You’ll invoice clients directly - in the same way you would as a sole trader - manage your own business expenses, and pay yourself via a combination of salary and dividends. There are limited company tax benefits for contractors, and you’ll find yourself with more control over your finances, contracts, professional standing and brand reputation. Plus, a limited company is a separate legal entity, which means your personal and business finances are kept apart and you benefit from limited liability protection.
What’s an Umbrella Company?
Though an umbrella company is another way to handle contracting, that’s where the similarities end. An umbrella company is essentially a third-party or ‘middle man’ that steps in between you and your clients. By joining one, you become an employee of the umbrella company, which handles contracts on your behalf. You submit timesheets, and the umbrella company handles invoicing, tax, National Insurance (NICs) and pays you through PAYE. Umbrella companies offer simplicity and legal compliance for contractors, but without the benefits of a limited company, take-home pay tends to be lower.
Pros and Cons of a Limited Company
There are pros and cons that come with contracting through a limited company, and understanding them all is key if you want to make the right decision.
The Pros of Limited Company Contracting
- Higher Take-Home Pay - If you’re working on contracts outside IR35, limited company contracting tends to be more financially beneficial. This is because dividends are taxed at a lower rate than salary, offering greater income retention.
- Control and Flexibility - When you contract via a limited company, you decide how to pay yourself, what expenses to claim and how to manage your profits.
- Tax Planning - As a limited company contractor, you have the ability to defer income, split dividends and make pension contributions in a tax-efficient way.
- Professional Image - Some clients prefer working with limited companies as it demonstrates business credibility and professionalism.
- Limited Liability - When you operate through a limited company, you gain limited liability protection, meaning your personal assets are protected if something goes wrong.
The Cons of Limited Company Contracting
- More Admin - As a limited company contractor, you’re responsible for company accounts, Corporation Tax, VAT returns and ensuring compliance. This can be complex, especially if you don’t have experience in the financial side of running a business.
- Director Responsibilities - You’re legally accountable for meeting filing deadlines and staying compliant, which adds more to your already full plate.
Pros and Cons of an Umbrella Company
As you might expect, there are also various pros and cons that come with using an umbrella company. By familiarising yourself with them, you’ll be informed enough to decide if umbrella company contracting is right for you.
The Pros of Umbrella Company Contracting
- Simplicity - There’s no need to worry about tax returns, invoicing or accountancy when you use an umbrella company, as everything is handled for you.
- Quick Setup - You can start contracting within a day of joining an umbrella company, as there’s no company formation required.
- IR35 Compliant - All income is processed through PAYE, removing the risk of IR35-related penalties. Working with an umbrella company reduces the chances of IR35 errors.
- Employee Benefits - Some umbrella companies offer holiday pay, sick pay, and access to a workplace pension scheme. These aren’t available if you’re a limited company contractor, and you’ll have to handle taking time off yourself.
The Cons of Umbrella Company Contracting
- Lower Take-Home Pay - As all umbrella company income is taxed at the source, your net pay is usually lower than it would be if you used a limited company.
- Umbrella Fees - Working with an umbrella company comes at a price. You pay a weekly or monthly fee, which can eat into earnings.
- Lack of Control - When you hand everything over to an umbrella company, you lose some control over your business. You can’t manage your income, delay withdrawals or claim business expenses in the same way.
The Key Difference Between Working for an Umbrella Company vs. Limited Company
The biggest difference between working through a limited company and an umbrella company is how much control you have, versus how convenient everything is. A limited company gives you full control over your business, income and how you operate. You’re the director and shareholder, which means you can decide how much to pay yourself, how to structure your dividends and salary, and how to manage your business expenses. This setup can be significantly more tax-efficient, especially if your contract is outside IR35.
But, an umbrella company is built for simplicity, making it a slightly more convenient option. You effectively become an employee of the umbrella, which takes care of invoicing, tax, NICs and payroll. This removes the burden of admin and compliance, making it ideal for contractors who are either inside IR35, working on short-term contracts or if you prefer not to manage the responsibilities of running a company yourself. However, this convenience comes at a cost. If you choose to contract through an umbrella company, you’re likely to get lower take-home pay, reduced ability to claim expenses and less flexibility in how you’re paid.
While both options are popular and widely used by contractors in the UK, the limited company route tends to be the ‘go to’ choice for contractors looking to maximise their earnings and retain full control over their contracting.
Which Approach to Contracting in the UK is Right for You?
There’s no right or wrong way to approach contracting in the UK; it all comes down to what works for you, your business and the amount of control you want over your career. If you’re happy to hand over the reins to someone else - letting them handle paying you, admin and the financial side of earning - and you would rather sit back, relax and focus on the day-to-day work you do for clients, working with an umbrella company is going to appeal to you. But, if you’re someone who wants to have control over growing your business, maximising your earnings and operating in a tax-efficient way, a limited company is likely going to come out on top.
You Don’t Have to Handle Limited Company Contracting Alone
Contrary to popular belief, running a limited company doesn’t mean doing everything yourself. There’s a lot of freedom that comes with being a business owner, and you are the only one in the driving seat. But, that doesn’t mean help isn’t out there. A lot of limited company contractors choose to work with specialist limited company accounts, who help you to navigate various complexities of running your own business. They can help with everything from setting up the company in the first place and helping you to claim business expenses, to managing VAT, Corporation Tax, payroll and Companies House.
They can even provide IR35 guidance and status assessments. With expert help available, contracting through a limited company doesn’t have to be stressful.
At Go Limited, we know how daunting it can be to set up a limited company. But, with support in place and a good understanding of what it means to be a limited company contractor, you can enjoy the freedom, flexibility and financial rewards of running you own business.
FAQs: Pros and Cons of Umbrella Company vs Limited Company for Contracting
1. Which option gives me the most take-home pay?
If you're working outside IR35, a limited company usually gives you higher take-home pay. You can pay yourself a combination of salary and dividends, which are more tax-efficient.
An umbrella company pays you through PAYE, so you'll pay income tax and National Insurance on your full earnings. It's simpler, but often less tax-efficient.
2. Is one option easier to manage than the other?
Yes – the umbrella company is definitely easier. They handle all your payroll, tax deductions, and admin. You just submit timesheets and get paid.
With a limited company, there's more to do: invoicing, tax returns, annual accounts, and compliance with Companies House. But many contractors hire an accountant to manage this for them.
3. What are the start-up and running costs for each?
1. Umbrella companies charge a weekly or monthly fee (typically £20–£35), which is deducted from your pay.
2. Limited companies have setup costs and ongoing accountancy fees. You might pay £80–£150+ per month for a contractor accountant, plus extra for annual filings and VAT returns if applicable.
3. So, umbrellas are cheaper in the short term, but limited companies can save more money long term if you're earning well and staying outside IR35.
4. Can I work through a limited company if my contract is inside IR35?
You can – but the tax advantages are limited. If you're inside IR35, you'll pay income tax and NICs much like an employee, even through your limited company. That's why many contractors choose an umbrella company for inside IR35 roles – it's simpler and avoids the hassle of IR35 compliance.
5. Can I claim expenses through both options?
Yes, but there's a big difference:
1. Limited companies can claim a wider range of business expenses, which can reduce your tax bill – such as home office costs, equipment, travel, and accountancy fees.
2. Umbrella companies have more restrictions. You can only claim certain expenses, and only if your role isn't under supervision, direction or control (SDC) – which is rare.
6. Do I have more control with a limited company?
Yes. With a limited company, you're the director – you control how and when you get paid, who you work with, how you claim expenses, and how you run things.
With an umbrella company, you're technically their employee. They pay you after tax, and you follow their process.
7. Will I still get statutory benefits with an umbrella company?
Yes. Since you're an employee of the umbrella, you're entitled to things like:
1. Statutory Sick Pay (SSP)
2. Holiday Pay
3. Maternity/Paternity Pay
4. Workplace Pension
5. This can offer more peace of mind if you're in between contracts or working less consistently.
8. Which is better for short-term contracts?
For short-term or lower-value contracts, or if you're new to contracting, an umbrella company is often the better choice. It's quick to set up, low-maintenance, and you don't have to worry about closing a company down later.
A limited company is better suited to long-term contracting, higher earnings, and roles outside IR35.
9. Can I switch between the two?
Yes – and many contractors do. It's common to use a limited company when working outside IR35, and switch to an umbrella company for inside IR35 contracts. Just keep good financial records and speak with an accountant if you're unsure how to transition smoothly.
10. Which option is better overall?
There's no one-size-fits-all answer – it depends on your situation:
1. If you want maximum tax efficiency and are confident running a business (or happy to hire help), a limited company is likely best.
2. If you prefer ease, simplicity, and are working inside IR35 or on short-term roles, an umbrella company may suit you better.
Still unsure? Speak with a contractor accountant – they'll help you figure out what works best for your earnings, contract type, and future plans.
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.
