Umbrella Company vs Limited Company

Umbrella Company vs Limited Company. If you’re a contractor, freelancer, or fancy becoming a business owner, it’s important to know your options. And, in a world of clients and contracts, there are two main types of payment structure. Limited companies and umbrella companies. But how do they compare, and which one should you choose?

What’s the difference between Umbrella Company vs Limited Company?

Control

• If you incorporate your business, your company will become a separate legal entity. Its finances will be independent from your own. So, your credit and personal assets are safe. You’ll also become a shareholder and director. This will give you autonomy over your business. You’ll have the freedom and jurisdiction to make key decisions, such as when profits get distributed.

• With an umbrella company, you’ll become an ‘employee’ but will continue to have the freedom of working for yourself. You’ll just get the security and continuity of employment as well.

Benefits

• Going limited can be the more tax-efficient way to contract long-term. It’s also a vehicle through which you can expand beyond contracting – if you wish to.

• There are plenty of perks with umbrella companies too. You’ll get sick pay, holiday pay, and maternity or paternity pay. Plus, with Danbro’s umbrella, you’ll have access to our exclusive private pension scheme. We offer insurance and BUPA healthcare entitlements, and an online timesheet portal. You’ll also be able to make full use of our leading HR and customer care teams. What’s more; there’s no set-up fee and no exit fee.

Responsibility

• For limited company directors, there are certain legal requirements you must adhere to. You need to consider whether dealing with higher levels of regulation and administration is going to detract from your day-to-day duties. If it is, why not look into umbrella?

• That’s not to say you’ll be free from responsibility with an umbrella company. For instance, you’ll be in charge of compiling things like timesheets and expenses.

 

Umbrella Companies, Limited Companies & IR35

IR35 affects contractors who work and ‘act’ like an employee of their end client but get paid via their own limited company. Changes to off-payroll working in the private sector are set for April 2021. The new rules transfer the responsibility for assessing the IR35 status of a contract from the person performing the work through their limited company, to their private sector client. So, if you bill for your services via a limited company despite working in the same way as an employee, these changes aim to ensure you’re paying the correct employment tax.

If you’re deemed inside IR35, you will get taxed in the same way as an employee. Though, this doesn’t necessarily mean you’ll receive all the statutory benefits associated with employment.

Umbrella company employees, on the other hand, are outside IR35. You can find out more about IR35 and how it affects umbrella companies, limited companies, and more, here.

How do they work?

So, those are some of the things that each solution has to offer, but how does umbrella company vs limited company work in practice? To help us explain, let’s use the help of a couple of familiar faces.

Umbrella Company Employee

• We’ll start with Minerva. She recently left a long-term role as a Professor at a prestigious selective school. Minerva decided to become a supply teacher – and contractor. She signed up to both an agency – Witches4Hire Ltd – and Danbro’s umbrella company. An agreement was then signed between ourselves and her agency.

• We also agreed a contract of employment with Minerva and she became our ‘employee’. All we need her to do is complete weekly timesheets which detail her hours of work and her expenses – if eligible. We’ll then take care of the rest. The bad news is, her expenses don’t cover the copious amounts of alcohol-free Butterbeer she consumes during the course of a working week.

• Once her timesheet’s completed and submitted to our online portal, we’ll invoice her agency. When the funds have been transferred to us, we’ll send Minerva’s statutory deductions to HMRC and set aside her tax-free deductions. This includes contributions to her pension. We’ll then retain our margin for the cost of employment. Danbro also take care of her tax, NICs, and any additional deductions before paying her wages into her Platinum account at Gringotts Bank. Furthermore, each time she gets paid, we’ll give her a payslip and reconciliation sheet. This will detail her weekly wages.

• Operating through an umbrella company is perfect for Minerva. It allows her to combine the flexibility of freelancing with the reliability of employment. She remains in employment both during and after each assignment. The continuity of employment she gets from Danbro also helped her apply for a mortgage. This was ideal, as Minerva had to give up the free, waterfront accommodation she’d gotten used to with her previous employers!

Limited Company Director

• Minerva’s former colleague, Rubeus, meanwhile, is a professional Groundskeeper. Following the death of his former employer, he opted to move away from employment and decided to go into contracting. With glowing references and decades of good service (a spell in a notorious island prison aside) Rubeus’ services were in high demand. So, he could afford to increase the fees he charges his clients.

• Rubeus’ contracts tend to be longer-term and his earnings total more than £15-an-hour. This meant that going limited was the better option for him. So, he decided to incorporate his business: The Green-Fingered Giant Ltd with Danbro. It took less than 24 hours and with his business fully registered with Companies House, he’s now a shareholder and director of his own company.

• With that taken care of, Rubeus could begin trading. Now, by his own admission, he’s not the quickest broom on the Quidditch pitch. So, he sought the ongoing support and guidance of his local accountancy firm, Danbro. It’s comforting for him to have the professional assistance of a personal accountant to help him maximise his pay and manage his tax returns.

• Being limited is great for Rubeus. With Danbro, he benefits from things like personal accountancy and tax planning. Plus, through our cloud-based accounting services, he’s able to make important business and cash flow decisions, based on high-quality, real-time information. He pays himself through a combination of salary and dividends, though he has wasted some of his income on dodgy dragon eggs from Bucharest.

So, Umbrella Company vs Limited Company?

There are myriad factors to consider before you make a final decision on which option is best for you. Think about the length of your contracts and the fees you charge. Look at the benefits you stand to gain, and the amount of control you’d like to have.

Whichever option you choose, it’s important to seek specialist, independent advice before you make your decision. For two decades, Danbro have delivered compliant, tax efficient solutions to thousands of contractors like you. We know what we’re talking about. So, whether you’re after an employment umbrella or a specialist business accountant, we’ll make it easy for you. For more information, or to explore your options further, get in touch today.