Go Limited - April - Comparison of Working Through a Limited Company Versus Umbrella Company in the UK
Go Limited - April - Comparison of Working Through a Limited Company Versus Umbrella Company in the UK
We can all agree that contracting has a lot of benefits; being your own boss, choosing your own projects and having complete control over your workplace, clients and schedule. But, not all contractors choose to contract in the same way. Two of the most common options are setting up a limited company or joining an umbrella company, and each has its own set of benefits.
Choosing the right approach to contracting can significantly affect your take-home pay, tax obligations and overall control over your work. Whether you're just starting out or you're looking to optimise your current contracting setup, understanding the difference between these two options is vital. At Go Limited, we know all there is to know about working through a limited company versus an umbrella company in the UK, and we've explored both options below.
Setting Up Your Own Limited Company
There are a handful of different ways to approach contracting, one of which is setting up your own limited company. A limited company is a separate legal entity created to run your contracting business through, giving full control over your business and its finances. As a limited company contractor, you are responsible for setting up the company - this is done through Companies House - invoicing clients, keeping financial records, and making sure that your taxes are submitted correctly. This can sound like a lot of work, but many contractors hire limited company accountants to help.
When you contract through a limited company, you have the freedom and flexibility to manage how you are paid. Usually, contractors take their income through a combination of a low salary and dividends, which can result in a higher take-home pay when compared to being taxed as a traditional employee.
Umbrella Company vs. Limited Company: What is an Umbrella Company?
As a contractor, you have the choice to work through an umbrella company. But, do you know the difference between an umbrella company and a limited company? When you use an umbrella company, you are using a 'middleman' to handle your contracting. Regardless of the type of work you do, or the type of contracts you take on, you can use an umbrella company to handle the complexities that come with contracting. Whereas limited company contractors have to handle this themselves, an umbrella company will do it for you.
It works by the umbrella company employing you, making it the intermediary between you and your clients. Instead of setting up your own company, the umbrella company handles all tax and National Insurance deductions for you through the PAYE system, which is the system used by employers and employees. Once you have completed a project for a client, you submit your timesheet or invoice to the umbrella company, and they invoice the client or agency on your behalf. Once paid, the umbrella company deducts income tax, National Insurance Contributions (NICs), and their own service fee. You are then paid the remainder as a take-home pay.
Key Differences: Contracting Limited Company vs. Umbrella Company
There's a number of differences between contracting via a limited company vs. umbrella company, and understanding those differences is key to choosing the right approach for your business.
Tax Efficiency and Increased Income
One of the biggest differences between an umbrella company and a limited company is how much of your income you can keep. With a limited company, you can pay yourself a small salary - for most limited company contractors, this is somewhere near the National Insurance threshold - and take the rest of your income as dividends. As dividends are taxed at lower rates than salary, which means that you have less tax to pay. This approach to contracting results in significantly less tax being paid overall, keeping more money in your pocket.
When you work through an umbrella company, you're taxed in the same way as an employee. This means that your income is handled by PAYE, and you end up paying full income tax and both NICs. There's no flexibility in how you take your pay, and you can't take advantage of lower dividend tax rates planning in the same way as a limited company contractor.
Business Control and Contractor Independence
When you set up your own limited company, you gain the benefit of having complete control over your business. You can choose when and how to work, who you want to work for, how to manage your finances, and how to structure your income. You also have the freedom to build a brand, grow your company over time and take full control over how your business venture grows.
This isn't the case if you work with an umbrella company, as you're thought of as an employee.
You don't have to worry about managing the business, dealing with HMRC or navigating the complexities of tax and NICs, but you also don't have as much control as limited company contractors. Instead of making all of the important business decisions yourself, you're an employee of someone else's company. This can be a downside for contractors who want to build a long-term, ongoing career as a self-employed freelancer.
Handling Administration and Paperwork
Regardless of the industry that you work in, setting up your own limited company requires a lot more paperwork and admin. You need to file annual accounts and corporation tax returns, submit VAT returns, handle your salary, keep accurate financial records and stay compliant with Companies House and HMRC regulations. But, hiring a limited company contractor is always an option. If you work with an umbrella company, they handle all administration and paperwork, and you can focus on clients and projects. There's no need to worry about bookkeeping, tax payments or company filings, as they do everything for you.
Contractor Expenses and Allowable Deductions
As a contractor, you can take advantage of tax deductible expenses for a limited company. These expenses could include travel costs, equipment and software, working from home expenses, professional training and development, and accountancy fees. These tax deductible expenses for a limited company reduce your taxable profit, which in turn reduces your tax bill.
However, these limited company tax benefits aren't available to umbrella company workers. This means that contracting through an umbrella company could mean that you end up paying more tax, as you can't reduce your limited company take-home pay.
IR35 Legislation Complexities
You will probably have heard of IR35 legislation, but do you know
what that means for contractors? IR35 is designed to identify contractors who are working as employees, and ensure they pay the same tax and NICs as other employees. If you are identified as working inside IR35, you lose many of the tax benefits that come with limited company contracting. If you're working through an umbrella company, IR35 doesn't apply, as you're already taxed as an employee. But, if you're working through your own limited company, you need to decide whether IR35 applies to each contract.
Umbrella Company vs. Limited Company UK: Which is the Most Financially Beneficial?
When you're deciding between an umbrella company and a limited company, your final decision is likely going to come down to which is the most financially beneficial. For most contractors, setting up a limited company comes out on top.
As a limited company contractor, you can reduce your taxable income with business expenses and dividend payments, which isn't the case if you work with an umbrella company. This keeps more of your income in your pocket, giving you more money to invest back into the business, into savings or to enjoy as disposable income. You also have a lot more control over how and when you pay yourself, giving you the freedom to choose the perfect balance between dividend payments and taking a salary.
While umbrella companies offer undeniable convenience and simplicity, there's no real financial benefit to working with one. But, a well-managed limited company can increase your take-home pay by a considerable amount.
Comparing Umbrella Companies and Limited Companies: Which is Right for You?
Deciding between a limited company and an umbrella company isn't just about convenience. For a lot of contractors, it's about control, tax efficiency and long-term financial gain. While umbrella companies offer a simple, ready-made way to contracting, they come at the cost of lower take-home pay and limited flexibility. Operating through a limited company involves more responsibility but, if you're happy to take on that responsibility, the rewards can be significant.
From lower tax liabilities to increased allowable expenses, and the ability to structure your income strategically, a limited company tends to be the 'go to' option for contractors in the UK. At Go Limited, we've seen many contractors compare limited companies and umbrella companies, deciding that setting up a limited company is the smarter and more profitable choice.
FAQ: Limited Company vs. Umbrella Company in the UK
1. How do I decide between a limited company and an umbrella company?
It depends on what you want from contracting. If you're looking for flexibility, higher take-home pay, and don't mind a bit of admin (or hiring an accountant), a limited company could be the better choice. If you just want to get paid without the hassle, an umbrella company keeps things simple.
2. Is a limited company worth it for all contractors?
Not necessarily. It's great if you're earning good money and planning to contract long-term. But if you're only contracting for a short period or earning a lower rate, an umbrella company might be the easier option.
3. What's the main benefit of an umbrella company?
It's hassle-free. You don't have to worry about tax returns, invoicing, or IR35. You just submit your timesheets, and they handle the rest—tax, National Insurance, and payroll.
4. How does IR35 affect my choice?
If your contract is inside IR35, you'll pay tax like an employee, making a limited company less tax-efficient. Umbrella companies already deduct tax like an employer, so IR35 doesn't matter for them.
5. Can I start with an umbrella company and switch to a limited company later?
Absolutely! Many contractors begin with an umbrella company while testing the waters, then set up a limited company once they're sure contracting suits them.
6. Will I take home more money with a limited company?
Usually, yes. A limited company allows you to pay yourself with a mix of salary and dividends, which can be more tax-efficient. With an umbrella company, tax is deducted before you're paid, so your take-home pay is typically lower.
7. What admin do I have to do if I run a limited company?
You'll need to submit accounts, file tax returns, and stay compliant with HMRC. It sounds like a lot, but a good accountant can handle most of it for you.
8. Do umbrella companies charge fees?
Yes, they take a weekly or monthly fee for handling payroll and admin. It's worth checking how much they charge and what's included.
9. What happens if I stop contracting?
With an umbrella company, you can just stop using their service. If you have a limited company, you'll need to either close it down properly or make it dormant if you think you might use it again later.
Go Limited FAQs: Limited Companies and IR35
1. What is IR35 and why does it matter for limited company contractors?
IR35, also known as the off-payroll working rules, helps HMRC determine if a contractor is genuinely self-employed or effectively working as an employee. If you're considered 'inside IR35', you’ll be taxed similarly to a full-time employee — significantly reducing the tax advantages of using a limited company.
2. Can I continue using my limited company if I’m working inside IR35?
Yes, but with limitations. While you can operate through your limited company, most of your income will be taxed through PAYE. This removes many of the financial advantages and increases your administrative workload. Contractors in this situation often consider switching to an umbrella company for ease.
3. What are the main benefits of using a limited company outside IR35?
If your contract is outside IR35, you can:
- Maximise tax efficiency by drawing a combination of salary and dividends
- Claim a wide range of allowable business expenses
- Maintain control over your working hours and financial decisions
- Present a more professional appearance to potential clients
4. What are the drawbacks of operating a limited company inside IR35?
Operating inside IR35 means:
- You’ll still have to manage company admin and compliance
- Your income will be taxed at standard employee rates (PAYE)
- Most tax-saving strategies, such as dividend payments and expense claims, won’t apply
5. What business expenses can I claim if I’m outside IR35?
Contractors operating outside IR35 can typically claim:
- Travel and accommodation related to business
- Work-related equipment and tools
- Software and subscriptions
- Accountancy and professional service fees Expenses must be wholly and exclusively for business use to be eligible.
6. How can I tell if my contract falls inside or outside IR35?
IR35 status depends more on your actual working conditions than on the contract wording. HMRC considers:
- Your level of control over how and when you work
- Whether you can send a substitute to complete the job
- Your integration into the client’s team You can use HMRC’s CEST tool or seek expert advice to determine your status accurately.
7. Should I use an umbrella company instead of a limited company?
An umbrella company might be a better fit if:
- You're working inside IR35
- You have short-term contracts
- You prefer not to manage admin and payroll Keep in mind that umbrella companies charge fees and your take-home pay will generally be lower.
8. Is forming a limited company worthwhile for long-term contractors?
Yes — if your contracts are outside IR35 and you intend to contract long-term. A limited company offers greater control, more tax-efficient income strategies, and long-term financial flexibility. Just ensure you’re prepared to handle the extra admin or hire a professional.
9. What happens if I misjudge my IR35 status?
If HMRC finds that you’ve incorrectly determined your IR35 status, you may face:
- Backdated tax payments
- Penalties and interest charges To avoid this, many contractors work with specialist accountants or IR35 consultants.
10. Can Go Limited help me choose between a limited company and umbrella option?
Yes. Go Limited offers personalised support to assess your contracts, explain IR35 rules, and recommend the most practical and tax-efficient structure based on your circumstances.
Final Advice:
Always check that your accountant or adviser has up-to-date expertise in contracting, IR35 compliance, and limited company regulations. Experience is as important as qualifications when navigating complex tax rules.
Note: All rates and thresholds are current at the time of publication but may be subject to change.
If you're a UK contractor in 2025, choosing between an umbrella company and a limited company can have a major impact on your tax efficiency and take-home pay. Umbrella companies simplify admin and use PAYE, but result in lower earnings due to higher tax and service fees. In contrast, limited companies offer greater flexibility and higher net income by allowing you to split pay between salary and dividends, and claim business expenses. While limited companies involve more responsibility and setup, they’re generally the most tax-efficient option for long-term, higher-earning contractors.
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
