Limited and Umbrella - What is the Difference?

Umbrella Companies

This is where a Freelancer or a Contractor becomes to an employee of an Umbrella Company. The individual provide the Umbrella Company with their time-sheets on a weekly basis. The Umbrella Company then invoicesthe Contractors client or agency on their behalf. Once payment is received by the Umbrella Company it then pays this over to the Contractor as PAYE income with tax deducted at source, they alsodeduct their fee. Typically you should expect to take home around 60% - 65% of your contract earnings using this method of operating.

Normally a Contractor can claim some expenses. You would need to produce receipts for any expenses claimed and you should be wary of Umbrella Companies that say you do not need to do this. HMRC show a great deal of interest in the expenses claimed by Umbrella employees.

You should typically take home around 60% - 65% of your contract by working through an umbrella company.

Limited Companies

The Limited Company structure that is considered here is for a genuine one person Limited Company set up that is run correctly in line with the Companies Act and HMRC guidance. Various other ‘schemes’ do exist from time to time, but these should always be treated with great caution as they are often not genuine.

For the Limited Company option the Freelancer or Contractor sets up a Limited Company and bank account, an accounting practice such as ourselves would be able to assist with this. The new director of the company then needs to maintain the accounting records of the company. We provide our clients with FreeAgent software, a simple online tool, which means that this task should take no more than 15 minutes per week.

The Limited Company's will contract directly with either the end client or the agency. A Limited Company can claim many more expenses than an Umbrella employee, for example: travel and subsistence, hardware and software, training, professional subscriptions, business telephone, accountancy fees in addition to any other valid business costs. As with the Umbrella set up receipts must be retained.

Taxation of Limited Companies is by way of Corporation Tax on the companies profits and personal tax on any drawings. Normally a low salary is drawn with the remainder taken as dividends. Dividends are more tax efficient than salary as Employer and Employee National Insurance is not payable on dividends. Small limited companies can also benefit from the flat rate VAT scheme (see our section on VAT). Typically you will take home around 75% - 80% of your contract by working through your own Limited Company.

Which Is Better?

Working through a limited company is far more tax efficient than an Umbrella due to the benefits of dividends, more allowable expenses and the ability to benefit from the flat rate VAT scheme. The downside of this approach is the greater administration required, it can be costly if you are contracting for only a short period and also there are likely to be no significant savings if your income is relatively low (less than £35k pa).

Freelancer Accounting is a specialist provider of fixed fee accountancy services to freelancers and contractors in London and the South East of England.

We understand that tax is complicated and we are happy to offer you face to face meetings at one of our office locations convenient to you.

You will have your own dedicated accountant as a point of contact.

We are accredited by the Professional Contractors Group (PCG) and are an ACCA Practice, so you will never have to worry about you tax and accounting affairs again.

If you are thinking of contracting or an existing contractor with questions and would like further advice, please do not hesitate to call your local Freelancer Accounting office on 0800 1357157 or email martyn@freelanceraccounting.com