Using an umbrella company over a limited company

As you may already be aware of, working as a contractor gives you a number of different options as to how you can operate, and how you can get paid. The most commonly used, as well as the most tried and tested payment structures/companies are that of  (PAYE) umbrella companies and one person limited companies. Each payment structure option brings with it its own set of advantages and disadvantages, all depending upon the amount of time you intend to work as a contractor, the level of experience you have already acquired, as well as the amount of time you are willing to spend handling on paperwork. We take you through the pros and cons of both of these established contractor routes.


Remember IR35 considerations

Regardless of whether you choose to an umbrella company or set up a limited company, it is important to note that it does not influence IR35 status of the contract you have, nor the modus operandi of the working agreement you have made. Furthermore, which route you choose will not influence a review by HMRC as to whether the contract you have falls within IR35 regulations.

Nevertheless,  since the Managed Service Company Legislation was introduced in 2007 it means that the PAYE Umbrella option has become the only truly viable option for contractors. This means that all income is paid as if the contractor is affected by IR35, which may have a considerable impact on your finances.

Furthermore, if you do decide as a contractor to take the company route then it is important to note that you will be required to run the limited company yourself. If you are operating outside of IR35 legislation, then it makes more financial sense to use a limited company in this regard.

Contracting through a PAYE Umbrella

With this option, by choosing to work under an umbrella, it means that the umbrella company you work for will essentially be acting as your employer. That means that you will submit any timesheets for contractual work to them, and they will then pay you a salary, once they have received payment by the agent whom you’ve carried out work for, having already deducted tax and National Insurance contributions.

Less paperwork with umbrella companies

None of us particularly enjoy the task of paperwork, but if you are a contractor, it is an important thing to consider, as it could be the difference between choosing an umbrella or limited company.

Another plus side of using an umbrella company when carrying out contractual work is that you will have less paperwork to take care of and have responsibility for. In the scenario that you choose to set up your own limited company, you would be fully responsible for all your accounts, taxes and salary. That means you would need to open your own business bank account, take care of invoicing, and make decisions as to how much you pay yourself.

Less time-consuming for contractors

You may find keeping up with all the administration and paperwork difficult to keep up with, especially if this is your first foray into contractual work. It is also time-consuming, as you will need to make sure that you regularly liaise with your accountant to ensure that all accounts and forms are filed by their due dates, or risk encountering penalty charges.

In addition, you can have the security of knowing with working alongside an umbrella company that the money will be lodged into your bank account, with all documents sent to you by the umbrella company breaking down how the payment has ended up being calculated.  There is no need for you to spend time on creating and updating a spreadsheet, or dealing with VAT returns, company accounts, taxation or other payroll matters, all of which can be tedious and stressful tasks to deal with as a contractor.

Advantages for short-term contractors

Another benefit worth mentioning is particularly pertinent to contractors who are only considering doing this kind of work on a short-term basis. This is because by using an umbrella company instead of setting up a limited company, you will not need to worry about the expensive process of forming a company in the first place, as well as arranging for its dissolution once you stop working as a contractor.

How to choose an umbrella or limited company

There are a variety of pros and cons when it comes to either of these options. Whatever decision you ultimately decide to make as a contractor, ask yourself the following questions first before settling on a final answer.

  • How important is it to control the company?
  • How do you feel about administrative duties, and dealing with forms, correspondence with accounts, spreadsheets, VAT returns etc, and dealing with them on a regular basis?
  • What is the IR35 status of your contractual work?
  • How long do you intend to carry out contractual work for? Do you intend to be working as a contractor for a brief period of time or for a number of years?
  • How important is it for you to be a company director when it comes to status with third parties?