As a contractor, the biggest decision you need to make is whether to operate under an umbrella company or as a limited company.


This is a good question to ask an accountant. In this short article, we highlight some of the differences between using an umbrella company and a limited company.

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What is an umbrella company?

What is a limited company?

What do limited company directors need to do?

Advantages of limited companies

Accountants for contractors



What Is an Umbrella Company?


An umbrella company acts as an employer to a contractor who may be working on a fixed term contract. The umbrella company will generally process the contractor’s time sheets and issue an invoice to the client – where the contractor works. The umbrella company will then pay the contractor through PAYE.


As a contractor, one of the quickest ways to start earning money is via an umbrella company.


Some of the benefits of being paid through an umbrella company include:


• It’s quick. You don’t need to go through the administrative hassle of setting up a limited company.

• The umbrella company will provide you with a contract of employment.

• The umbrella company will handle income tax and National Insurance contributions.

• This gives you more time to focus on work.

• You may claim legitimate business expenses during the term of your contract.

• Any eligible expenses such as travel and subsistence may reduce the amount of your taxable pay, meaning more in your pocket.

• You will receive holiday pay via an umbrella company.

• You will receive employment rights.


This makes using an umbrella company the closest thing to working as an employee.



What Is a Limited Company?


The obvious alternative to using an umbrella company is to set up a limited company.


Operating as a limited company can mean that you will receive more income than if you were working for an umbrella company. However, you will also have a lot more responsibility.


Here are some of the benefits of setting up a limited company for contracting:


• You will have limited liability – if you lose your business, you will have legal and financial protection.

• Your marketing reach could extend to potentially larger clients that will only work with limited companies.

• You can borrow capital on your business which will help with expansion.

• You can put in place an exit strategy to sell the business in the future if relevant to your needs.

Operating through a limited company will also allow you to claim back a lot of expenses – including IT equipment to help run your business, travel costs, accountancy fees and a lot more.


 For more information, take a look at our guide to choosing the right structure for your business.



What Do Limited Company Directors Need to Do?


Although operating through a limited company will increase your take home pay, it also involves more work than being employed by an umbrella company.


Some of the duties of a limited company director include:


• Ensuring Companies House is informed of any significant changes to the company.

• Ensuring timely completion of accounts and tax returns to avoid penalties.

• Accurate record keeping.

• Invoicing clients directly.

• Ensuring any tax is paid on time to avoid penalties.

• VAT returns, if required.

• Responding to any communication from HMRC and Companies House.

• Completing your annual self assessment tax return.

• Ensuring IR35 compliance.


It’s important to stay on top of these duties. Otherwise, you could be landed with a nasty unexpected bill from HMRC or Companies House.



Advantages of Limited Companies


A limited company allows you to have more control of your business as you are now responsible for your own tax affairs.


You can also register for VAT on the flat rate VAT scheme, which helps you retain some of the VAT you receive. Again, this means more money in your pocket.


Should you wish to grow your business in the future by employing extra members of staff, this can be done easily through your limited company.


Of course, operating as a limited company requires a little more paperwork and admin than if you were to go down the umbrella company route.


Before you jump into any decision there’s a lot more that needs to be considered. It’s worth seeking some input from a local accountant or business advisor.


Check out our in-depth article on the advantages and disadvantages of a limited company structure.



Accountants for Contractors – Appleby Mall


We have a specialised team of contractor accountants who will help you to set up correctly and efficiently. We can show you examples of other contractor clients that we are working with and help you to put a plan together.


If you would like to speak to a specialist contractor accountant, please get in touch. A member of our contracting team will sit down with you to discuss your business – and help you to keep more of what you earn.


Happy contracting!

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