Go Limited - Pros and Cons of Umbrella Company vs Limited Company for Contracting
Go Limited - Pros and Cons of Umbrella Company vs Limited Company for Contracting
As a contractor, you have a big decision to make. Do you want to set up a limited company online and contract through it, or do you want to work with an umbrella company? There are pros and cons of each, especially when it comes to how much tax you'll have to pay, how much admin you'll have to do and how much of your income you will get to keep.
At Go Limited, we know all there is to know about umbrella companies and limited companies, and we're here to help you make the right decision for your business, career and lifestyle.
How Should You Approach Contracting: Limited Company vs Umbrella Company
What's a Limited Company?
When you set up a limited company online, you do so via Companies House. This creates a business and, as the owner, you become the director. You are a separate legal entity to your limited company, which means that your personal finances and assets - such as any property you own and your savings - are completely separate from your business, and are not at risk if your limited company falls into debt. Clients pay your business, and then you pay yourself through a combination of salary and dividends. You're responsible for paying tax, VAT and
submitting annual accounts, but it tends to be the more ril - tax efficient, flexible and professional way of running a freelance or sole trader business.
What's an Umbrella Company?
Of course, as a contractor, you're not obligated to set up a limited company. You also have the option to contract through an umbrella company. An umbrella company acts as a middleman between you and your clients, and you're treated as an employee. You're paid via PAYE and the umbrella company handles all your taxes, National Insurance and deductions on your behalf. This means that you can focus on clients and projects, but you do lose the ability to pay yourself in a tax efficient way. It's a simple and straightforward option if you don't want to be bogged down by admin, paperwork and HMRC, but your take-home pay is likely to be lower.
Umbrella Company vs. Limited Company UK: The Pros and Cons of Each
There's no right or wrong answer when it comes to how to handle your contracting, and the right option will depend on various factors and how much control you want over your business. There are pros and cons of each, and comparing an umbrella company vs. limited company is key if you want to ensure you make the right decision.
The Pros of Contracting Through an Umbrella Company
1. It's Simple and Convenient - There's no denying that contracting through an umbrella company is simple, straightforward and convenient. There's no need to worry about accounting and keeping on top of your tax, as that's all taken care of for you. The umbrella company handles everything on your behalf, leaving you with a lot less admin.
- It's Easy to Set Up - There's no lengthy process to move your contracting to an umbrella company, and it usually only takes a few minutes to get everything organised. There's no lengthy forms to fill in and you don't have to give Companies House a second thought.
- Your Tax Compliance is Streamlined - When you work with an umbrella company, you are paid via the PAYE system. This means that you're automatically compliant with tax rules and IR35 legislation. There's no need to worry about HMRC investigations, misclassification or getting things wrong.
- There's Less Responsibility - If there's one thing that sways contractors into working with an umbrella company, it's that there's less responsibility. You don't need to file tax returns or manage VAT, corporation tax or payroll, and you don't need to worry about tax deductible expenses for a limited company. You simply go to work, get paid and relax, knowing the umbrella company has taken care of everything.
The Cons of Using a Umbrella Company as a Contractor
- Your Take-Home Pay is Usually Lower - One of the biggest downsides of using an umbrella company as a contractor is that your take-home pay is usually lower. You're taxed as a PAYE employee, which tends to result in a lower take-home compared to a limited company.
- Umbrella Companies Charge Fees - As umbrella companies are providing a service, they also charge a fee. Umbrella companies charge a weekly or monthly fee, which will reduce your income. This isn't a cost you'll have if you set up a limited company online and contract that way
- There's No Dividend Tax Planning - Though organising your salary as a contractor can be complex, you do benefit from dividend tax planning. When you're working with an umbrella company, you can't split your income between a salary and dividends, which limits tax efficiency.
- Lack of Autonomy - Setting up a limited company means that you own a business, but you don't if you use an umbrella company. You're an employee of the umbrella and have less control over your finances, and you don't get the autonomy that comes with being a business owner.
The Pros of Contracting Through a Limited Company
- It's a Way to Maximise Tax Efficiency - When you compare umbrella and limited companies, the main thing that stands out is likely to be that limited companies help to maximise your tax efficiency. There's a whole host of tax deductible expenses for a limited company contractor, which help to reduce your taxable income. You also have the freedom to structure your income via a low salary and high dividends system, reducing your income tax and ational Insurance. This keeps more money in your pocket.
- Take-Home Pay Tends to Be Higher - When you set up a limited company for contracting, your tax-home pay is higher. Contractors operating outside IR35, and through a limited company, typically take home a lot more of their income. This varies depending on expenses, income level and accounting practices, but these aren't things you can take advantage of when you're working with an umbrella company.
- Full Control Over Your Finances - As a contractor with a limited company, you can decide when and how to pay yourself. You can also choose what expenses to claim and if you want to take any dividends, which are already pre-set for you if you're using an umbrella company. You'll also know what's going into your business, what's going out, and what's going into your pocket at the end of the money.
- Business Growth Opportunities - There's a lot more scope for business growth when you're contracting through a limited company. You can keep more profits in the company, invest in assets, build company credit and grow your business over time. You might even end up employing others. When you're working under an umbrella company, this is rarely an option.
- Enhanced Professional Image - Many businesses prefer to work with limited companies rather than sole traders or umbrella employees, especially larger organizations. This preference exists because having a limited company demonstrates professionalism and commitment. As a result, this can lead to more significant and better contracts.
The Cons of Setting Up Your Own Limited Company for Contracting
- Administrative Responsibility - The primary disadvantage of establishing your own limited company for contracting is the increased administrative burden and paperwork involved. You are responsible for submitting annual accounts, paying corporation tax, managing VAT and payroll, and filing confirmation statements.
- IR35 Risks and Complexity - As a contractor with a limited company, you need to understand the difference between working inside and outside IR35. Working inside IR35 reduces the tax benefits of a limited company, but if you make a mistake, compliance can become murky.
- Paying Professional Fees - There's a lot of admin that goes into contracting through a limited company, which is why a lot of contractors hire an accountant to stay compliant. This comes at an extra cost, but it does simplify the paperwork side of things.
- Longer Setup Time - Though there's nothing too complicated about setting up a limited company, it does take slightly more time than signing up to an umbrella company. It takes time to register your company, open a business bank account and get everything in place before starting work.
- Ongoing Compliance - The compliance that comes with setting up a limited company isn't a 'one time' thing, it's an ongoing responsibility. You need to keep proper records, understand HMRC rules and ensure all filings are done correctly. If you don't, you could face penalties.
Umbrella Company vs. Limited Company: Which is Right for You?
The umbrella vs limited company decision is not a 'one size fits all' answer, and it depends on the types of contract you work on, your income, your expenses and how much responsibility you want to have. At Go Limited, we've seen a lot of contractors weigh up the pros and cons of both, and many decide to go down the limited company route. By giving you more flexibility, freedom, expense options and increased take-home pay, it's easy to see why it usually comes out on top.
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.
Frequently Asked Questions: Limited Companies
What are the advantages of a limited company?
Limited companies offer several benefits including limited liability protection, tax efficiency (especially through dividends), professional credibility, and the ability to raise capital more easily than sole traders or partnerships.
Are there any disadvantages to running a limited company?
Yes. Limited companies come with more paperwork and regulatory responsibilities, including filing annual accounts and corporation tax returns. Directors also have legal duties and personal liability if they breach them.
What is the difference between a private limited company and a public limited company?
A private limited company (Ltd) cannot sell shares to the public, whereas a public limited company (PLC) can list shares on the stock market. PLCs have more regulatory requirements and must have at least £50,000 in share capital.
What are the advantages of being a limited company in Scotland?
The advantages are largely the same as elsewhere in the UK: limited liability, tax planning opportunities, and increased credibility. In Scotland, you also benefit from local economic support and access to Scottish government grants.
Can a limited company save me tax?
Potentially, yes. A limited company pays corporation tax on its profits, which is often lower than income tax for higher earners. Directors can also pay themselves through a combination of salary and dividends to be more tax-efficient.
What are the main advantages of a limited company compared to a partnership?
The two key advantages are:
- Limited liability – your personal assets are protected.
- Separate legal identity – the company can enter contracts in its own name.
What is a company limited by guarantee, and what are its advantages?
This is a type of company typically used by non-profits or charities. Instead of shareholders, it has members who guarantee a small sum if the company is wound up. It offers limited liability and a formal structure for non-commercial organisations.
What are the advantages of putting property into a limited company?
Using a company can offer tax advantages on rental income and allow for easier inheritance tax planning. However, this depends on your situation and comes with additional costs like higher mortgage rates and potential capital gains tax.
Is there any benefit to having a company car through a limited company?
A company car can be convenient and tax-efficient for electric vehicles. However, petrol or diesel cars often come with high benefit-in-kind (BIK) tax charges. It's best to assess whether personal or company ownership is more cost-effective.
Can I get life insurance through my limited company?
Yes. A Relevant Life Policy allows your limited company to pay for your life insurance, which can be tax-efficient. It’s an allowable business expense and may reduce corporation tax, without being treated as a benefit-in-kind.
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.
