Financial Planning: Umbrella or Limited Status for your Company

Sasha Says

As a start-up, one of the first things you need to decide is whether you should trade as a limited company or use the services of an umbrella company. You aren’t an accountant, so you’ll be forgiven if you feel overwhelmed by such a decision.

In the following paragraphs we’ll breakdown the key benefits of both options to help paint a clearer picture as to whether you should be limited or umbrella company. It is important that you seek the advice of an accountant before making a final decision.

The key differences between umbrella and limited
Both options are extremely different from one another, so it is vital that you understand the key advantages and disadvantages of both options before you are able to make a decision.

Limited Company
In a nutshell, the limited company route will see you incorporate your own limited company and become the director. You’ll be in charge of invoicing and the day to day running of the business (with the help of your accountant) and it is the most tax efficient way of trading, seeing you typically take home around 75% to 80% of your gross earnings.

Registering your limited company is quite straightforward, you’ll need to think of a company name and everything can be completed online in a matter of minutes.

It is also advisable before proceeding any further into registering your newly founded company, to enlist the help of a law firm, who can take you through all the necessary steps.

Advantages:

    • The most tax efficient way of trading
    • You can claim for a wider range of expenses
    • Limited liability
    • Access to the Flat Rate VAT Scheme
    • Greater opportunities for tax planning
    • You have full control over invoicing

Disadvantages:

    • There is a certain amount of paperwork but this should take no more than 20 minutes each month.
    • Not ideal for short term self-employment
    • Not ideal for those who earn less than £25k per annum

Umbrella Company
Now that we have covered limited companies, let’s take a closer look at umbrella companies. Umbrella companies are different in that you don’t gain self-employed status, whilst you have the benefits of being your own boss, the umbrella company will invoice your client(s) on your behalf and then pay you like a standard PAYE employee.

If you think an umbrella company might be the best option for you, take a look at this comprehensive guide from Contractor UK for more information.

Advantages:

    • Very straightforward with minimal paperwork
    • All tax and NI is deducted for you
    • You don’t have to submit a tax return
    • Ideal for short term self-employment
    • Ideal if you earn less than £25k per year

Disadvantages:

    • The least tax efficient way of working – you’ll take home around 60% to 65% of your gross earnings
    • You have to rely on the umbrella company to invoice and pay you in a timely fashion
    • No opportunities for tax planning.

When searching for an umbrella company, make sure they are fully transparent about their fees. Most firms will charge a flat rate, but others tend to include a few hidden extras. You’ll feel much more comfortable if you know exactly how much the umbrella company charge for their services and you’ll be able to carry out personal financial planning much more easily.

You should now have a more complete understanding of the differences between umbrella and limited. If you think that you might not be self-employed for a long period of time, an umbrella company is probably the best option for you. However, if you are thinking more long-term and expect to make more than £25k per annum, a limited company would be more appropriate.

There are numerous companies and organisations who will be willing to speak with you to help you decide which route is best, so make the most of them.