The difference between umbrella companies and limited companies

If you are new to contracting then this is the article you need to read to stay up to date as well as learn more about the difference between umbrella companies and limited companies. Of course, the main thing that every contractor wants is to take home the maximum amount of pay as possible, that is the main reason why so many individuals are attracted towards the contractor schemes.

As you might be able to imagine, there are benefits to both of these kinds of models of earning. This means that it is extremely important that you understand the pros and cons of both of these models, this then ensures that you pick the right umbrella company or limited company for you.

So, let us first explain the difference between a limited company and an umbrella company.

Limited companies explained

With a Limited Company, you are the director of your own business. You will have the complete control over how you decide to work and who you choose to do business with. Some contractors work through their own Limited Company as this structure offers a range of benefits from autonomy, limits individual liability and provides essential tax benefits.

A Limited Company is the most tax-efficient way to operate as a contractor. Contractors who work through their own company have the ability to save on tax and National Insurance contributions (NIC), compared to working as a usual permanent or Umbrella employee. However, the amount of tax and NIC saved depends on the level of income that the company receives, and how the profits are paid out to yourself, the contractor. Getting expert advice from a contractor accountant is the best way for you reap the tax benefits from the outset.

As a Limited Company, you can pay yourself a basic salary as well as certain tax-free expenses, including a contribution to a pension scheme held in the name of the contractor in question. Limited Companies must pay corporation tax, plus VAT and NIC on your salary. Any funds that remain represent the profit which can be paid out as any sort of dividend, or left within the Limited Company until you want to take it or close down the limited company. The flexibility over when to take income out of the company offers further tax planning benefits.

You get to choose how much to take as a salary, and therefore how much money will be left to pay out in the form of dividends or into the limited company. Of course, the mixture of this will affect how much you will pay in tax.

an umbrella company

Here are some advantages of a Limited Company

  • A Limited Company offers the most tax-efficient solution in terms of getting as much of your earnings as possible.
  • You can keep complete control of all your company matters, allowing for greater opportunities for tax planning and business. This includes drawing dividends, claiming expenses and making pension contributions with ease.
  • You have the full ownership of your revenue as your client pays directly into the limited company bank account rather than passing through an Umbrella Company – this means there are faster transaction times and no risks to your earnings.
  • Greater flexibility and independence as you get to retain control over which contracts you secure and can work as much or as little as you choose.
  • There is limited personal liability as company assets are separate from personal assets.
limited company

Disadvantages of a limited company

  • As a Limited Company director, you’ll have a number of statutory and financial obligations to HMRC and Companies House; you will be responsible for your company’s financial accounts, submissions and meeting your HMRC tax deadlines.
  • You’ll also be responsible for the day to day management of your company, including invoicing, record keeping and financial management.
  • There are heavy penalties if tax returns are not filed when due, payments are not made on time or reporting mistakes are made.
  • You are at higher risk of being caught by the IR35 legislation – you must ensure you are working as an entirely separate entity to any organisation you are contracting for, and be able to provide proof of this. If you are found to be operating within IR35 and not declaring it, you could be taxed more and fined.

Concentrating on umbrella companies now

umbrella companies

When you join any Umbrella Company, you effectively become an employee of that company. While it might not be as tax efficient as using your own Limited Company. Usually umbrella companies offer a relatively stress-free way to become a contractor. This can appeal to any type of contractors or even, those who would rather not take on any form of administration responsibilities. Working under any umbrella company also makes determining your IR35 status a lot easier, there is absolutely no problem working within IR35 in this situation as long as you are aware that your tax and national insurance contributions will be calculated at the standard rate, rather than based on how much you earn compared to a limited company.

Being payed via an umbrella company is usually through an online system as you will be placed on a contract, your hours that you have worked and expenses will be submitted to the umbrella company.

After this, depending on how you have been employed by the umbrella company, the umbrella company will then invoice the recruiter or the client.

You are then paid via the PAYE system which is salary based after deductions for your national insurance, umbrella company fees and expenses. You will then receive a payslip with this balance.

The Advantages of an umbrella company

  • There’s significantly less time used or expenses compared to setting up your own Limited Company. There’s no company set-up fees or many forms you have to sign, you simply sign up (enter an employment contract) and you’re ready to become a contractor.
  • You are not the director of the umbrella company and thus have no responsibility for the financial accounts, tax returns and any other finances of the Umbrella Company in question.
  • As an employee of the Umbrella company, they will collect your money on your behalf from the client or company and pay you your salary after deducting their fees and any national insurance contributions.
  • Umbrella Companies will hold the contract with your recruitment agency or client, therefore handle all the contractual side of the relationship between this for you.

There isn’t a likelihood to be any issues about your IR35 status as you will be paying the necessary tax and national insurance contributions through the PAYE system.

The disadvantages of an umbrella company

umbrella company limited
  • You are not the director of the umbrella company, that means you don’t have any control over the company neither the company’s accounts and policies.
  • You take on a certain amount of risks as your money travels throughout the bank account of a company you have zero control over. Should the umbrella company become bankrupt or the directors of that company be prosecuted for any reason what so ever, you could lose all of the money being held by them at the time.
  • The government have brought out legislation which states that any agency work completed under a contract that lasts for 12 weeks or more means you must be granted the same employment rights as any permanent members of staff. This includes being paid holiday pay, sick pay, and any pension contributions you wish to add. The umbrella company itself may withhold a proportion of your salary to cover these costs.
  • You will still be responsible for your own tax affairs which includes submitting yourself a self-assessment tax return form, but only if HMRC ask you to complete one.
  • You will be responsible for finding a compliant umbrella company; some umbrella companies do offer above-average rates of return and these could later in the year be considered tax avoidance schemes by HMRC; as a contractor you will still be liable for any tax unpaid.


It is completely up to you whether you choose to go down the route of creating your own limited company or if you want to join an umbrella company. You have all the information here to make that decision and that choice is entirely yours to make. However, if you wish to join an umbrella company then why not give us here at Comparison Contractor a try and one of our incredibly helpful staff members will help you in any way that they can.