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Contractors: Umbrella vs limited company

One of the first questions you have to think about when you start work as a contractor surrounds business structure: should you incorporate your business or work under an umbrella company?

While the majority of contractors go with the limited company option, there are growing numbers of umbrella companies in the UK, offering a relatively simple and easy way to start contracting.

There are advantages and disadvantages to both ways of working, and the right one for you will depend on your personal preference.

To help you make your decision, we’ve set out the main differences between the two.

If you’re starting a business and are not sure which structure is best for your needs, see our previous blog on choosing a trading entity.

Limited company

To establish yourself as a limited company, you need to incorporate your business, becoming a company director.

Advantages

Tax-efficiency: While the tax advantages of company directors have been reduced in recent years, it’s still generally more profitable to draw your income as a combination of salary and dividends than to receive income as an employee.

Flexibility: You’re in control of your own company, and can choose when and how to take your income.

Professionalism: Being able to put ‘Ltd’ on the end of your name can make a significant difference to the way you’re presenting yourself to potential clients.

Additionally, some organisations refuse to work with contractors who are not operating as a limited company, so incorporating can sometimes expand your options for securing work.

Disadvantages

Increased responsibilities: You’ll be responsible for all the setup, administration, filing and record-keeping that comes with being a company director.

This can be a drain on your time and energy – unless you have a team of experts to help. We can handle everything from incorporation to filing your accounts.

Umbrella company

With this method, you become an employee of an umbrella company scheme and work on a fixed-term contract.

Advantages

Less paperwork: Put simply, unless you have the help of a specialist, it’s easier to operate as an employee than a director. You don’t have to worry about administrative and regulatory duties, as the umbrella company will take care of them.

If you’re contracting temporarily or just starting out, working under an umbrella company can be a good option to try it out without the commitment of running a company.

Disadvantages

Lack of control: The other side of this is that you won’t have a lot of control over your work and how much you’re paid.

Not as tax-efficient: As an employee, you won’t have the tax advantages of operating as a company director.

Talk to us

There’s no right or wrong answer to which structure you should use as a contractor, as it depends on the kind of work you do and how you’d prefer to manage it.

We can help you decide which option works best for you, and handle any setup involved.

Contact us at 01628 631 056 or email tracya@knightandcompany.co.uk to discuss your options as a contractor.