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
Trust us, we understand the appeal of contracting. There’s freedom, flexibility and a lot of room for professional growth when you’re a contractor in the UK. But, you need to decide how to approach things. There are two main routes - umbrella company contracting and limited company contracting - and you need to decide which is best for you.
At Go Limited, we keep contracting simple. Whether you’re debating signing up to an umbrella company or you’re getting your ducks in a row for limited company setup, our experts are here to help.
Contracting in the UK: What is an Umbrella Company?
There’s a number of ways to approach contracting in the UK, one of which is using an umbrella company. This means using a company who acts as the ‘middle man’ between you and your clients, taking away a lot of the administrative burden that comes with invoicing, payments and taxes as a contractor. With an umbrella company processing your pay via PAYE - which means they deduct income tax and National Insurance, so you don’t have to - you have one less thing to worry about. All you need to do is submit timesheets to them, and they handle the rest.
Another Way to Contract: What is a Limited Company?
Along with using an umbrella company, you have the option to operate via a limited company. This involves you, as a contractor, setting up a limited company and becoming a separate legal entity to your business. With a limited company, you have complete control over the way you work, how you get paid and how you interact with clients. You become the director and shareholder, which allows you to invoice clients directly, pay yourself a combination of salary and dividends, and claim allowable business expenses. These aren’t an option if you work under an umbrella company. It’s more responsibility and admin on you, but you do have limited company tax-efficient benefits to take advantage of.
The Pros and Cons of Contracting Using an Umbrella Company
There’s a lot of pros that come with contracting using an umbrella company, which is why it’s something a lot of contractors do. However, there are also a handful of cons to be aware of.
The Advantages of Contracting via an Umbrella Company
- Easy to Get Everything Set Up - Once you’ve decided to use an umbrella company for contracting, it doesn’t take long to set everything up. Within a matter of hours, you can have everything organised and ready to go, because umbrella companies don't hang about.
- No Admin or Accounting Duties - As an umbrella company handles everything including income tax, National Insurance, invoicing and payroll, you have a lot less admin to think about. You won’t need to file annual accounts or manage bookkeeping.
- IR35 Compliant - IR35 legislation is a big part of contracting, and it can be complicated. But, with an umbrella company, this isn’t something you need to worry about. If your contract is inside IR35, working with an umbrella company is a simple way to stay compliant.
The Disadvantages of Contracting via an Umbrella Company
Of course, it’s not all positive when you choose the umbrella company route.
- Lower Take-Home Pay - When you work with an umbrella company, PAYE deductions apply as if you're a full employee. You don’t have the freedom to pay yourself in a tax-efficient way, which significantly reduces net income.
- Umbrella Fees - There’s a price to pay when you work with an umbrella company. Though these costs aren’t high, they do add up, and you’ll likely have to pay them even if you don’t have much work coming in.
- Limited Expenses - Most allowable expenses can’t be claimed unless they’re reimbursed by the client, which means you could miss out on reducing your tax bill, compared to being a limited company contractor.
- Lack of Control - You have to rely heavily on the umbrella company for accurate payroll and administration, and mistakes or delays can affect your income, even if they’re out of your control.
The Pros and Cons of Setting Up Your Own Limited Company
A lot of contractors choose to set up a limited company, and there’s a lot of reasons for this. Though there are downsides, as you would expect, the majority of contractors looking to grow their business tend to focus on this route.
The Advantages of Having Your Own an Limited Company
- Higher Take-Home Pay - When you have your own limited company, you can pay yourself through dividends, which are taxed at a lower rate than salary. This results in higher take-home pay, keeping more of your earnings in your pocket.
- Tax Efficiency and Planning - Setting up a limited company doesn’t mean you avoid paying tax, but it does mean you can operate in a tax-efficient way. You can choose a low salary to reduce National Insurance, and pay yourself in dividends to lower income tax.
- Claim More Business Expenses - There’s a wide range of business expenses you can claim as a limited company contractor. Computers, software, travel - as long as it’s outside your regular commute - training, professional fees and home office use are often deductible.
- Full Financial Control - There’s a lot of unknown that comes with being a limited company contractor, but you do have full financial control. You decide how and when to pay yourself, build savings or invest through your company.
- Build a Professional Brand - Some large, established businesses prefer to work with limited companies, with some overlooking sole traders altogether. A limited company boosts your credibility and can help you to engage clients.
The Disadvantages of Operating via a Limited Company
As is the case with an umbrella company, there are downsides of operating via a limited company. However, most contractors find that the benefits of setting up a limited company outweigh the negatives.
- Administrative Burden - There are definitely downsides of contracting through a limited company. You’ll need to stay on top of annual accounts, VAT returns, self-assessment tax returns, payroll and Corporation Tax.
- Legal Responsibilities - As a limited company director, you’re responsible for compliance with Companies House and HMRC rules. These can be hard to keep up with, which is why a lot of contractors enlist the help of specialist accountants.
- Upfront Costs and Accountancy Fees - There are costs and fees that come with operating a limited company, including accountancy fees, bank fees and insurance. You’ll need to factor these into your budget.
- The Impact of IR35 - If your contract is inside IR35, the financial benefit of a limited company disappears, but you’ll still have to deal with the admin side of things.
How Does IR35 Impact Limited Company vs Umbrella Company Contracting?
If you’ve looked into contracting, you’ll have come across IR35. This is a type of legislation that’s used to stop people from disguising their employment. If your contract is deemed to be inside IR35, HMRC sees you as an employee for tax purposes. This means that your tax advantages as a limited company disappear, putting you in the same position as an employee. If that’s the case, using a limited company gives you little to no financial benefit, and it’s one of the reasons people opt for an umbrella company. If you’re not benefiting financially from setting up a limited company, you might want to consider the umbrella company route for simplicity. But, if you’re outside IR35, a limited company can significantly increase your take-home pay.
Umbrella Company vs. Limited Company: Which is Better for You?
As you can see, there are pros and cons of umbrella companies and limited companies, and it’s not always easy to decide which route is best for you. For some contractors, going from being a sole trader to a limited company contractor is the obvious option. But, for others, a pitstop with an umbrella company makes more sense. One of the great things about being a contractor is that there’s no rush, but there is a lot of flexibility. If you’re currently a sole trader or you’re working with an umbrella company, you always have the option to set up a limited company further down the line.
Ask the Experts: What Do We Think?
While umbrella companies are simple and offer some major benefits, limited companies tend to come out on top, especially long-term financially. If your contract is outside IR35 and you're earning a higher day rate, setting up a limited company is likely to be the best choice. Though there's more responsibility and admin, the increase in take-home pay and tax-efficient way of working can usually justify hiring a good accountant to handle it.
At Go Limited, we know how complex contracting can be, especially if you’re considering a limited company for the first time. But, our experts are here to help. With our guidance and online resources, limited company contracting can be a simple, stress-free and simplified process.
FAQ: Umbrella Company vs Limited Company for Contracting
1. What’s the main difference between an umbrella company and a limited company?
The key difference is how you’re paid and taxed.
- With a limited company, you're running your own business and have more control over your finances, taxes, and expenses.
- With an umbrella company, you're effectively an employee — they handle tax, National Insurance, and admin on your behalf.
2. Which option gives me higher take-home pay?
In most cases, working through a limited company (outside IR35) gives you higher take-home pay due to tax efficiency and the ability to claim allowable expenses.
However, if your contract is inside IR35 or short-term, the difference may be minimal.
3. Is it easier to use an umbrella company?
Yes. Umbrella companies are simple and hassle-free. You just submit your timesheets and get paid — no need to worry about bookkeeping, tax returns, or running a business.
4. What are the benefits of setting up a limited company?
- Greater tax efficiency
- Full control over business income and expenses
- Can build your own business brand
- Potential to retain profits and plan for dividends
5. When does using an umbrella company make more sense?
It may be better to use an umbrella company if:
- You're on a short-term contract
- You're inside IR35
- You don’t want to manage admin or accounting
- You’re new to contracting and want a simple start
6. Are there more responsibilities with a limited company?
Yes. As a company director, you’re legally responsible for:
- Filing accounts and tax returns
- Paying Corporation Tax and VAT (if registered)
- Keeping records
- Ensuring compliance with HMRC and Companies House
7. What are the IR35 implications for each option?
- Limited company contractors must determine their IR35 status and could face tax implications if caught inside IR35.
- Umbrella workers are taxed as employees, so IR35 does not apply to them.
8. Can I switch from an umbrella to a limited company later on?
Yes. Many contractors start with an umbrella for simplicity, then switch to a limited company once they’re confident or have outside-IR35 contracts.
9. Which is better for long-term contracting?
If your contracts are outside IR35 and you want to maximise income, a limited company is often more beneficial long-term. If you prefer ease or expect to return to permanent work, umbrella may suit you better.
10. Are expenses handled differently?
Yes:
- With a limited company, you can claim a wider range of business expenses.
- With an umbrella company, expense claims are more restricted and must comply with strict rules (especially post-2016 travel and subsistence reforms).
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.
