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Posted 4th January 2017

Umbrella vs Limited Company FAQ

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At Exchequer Solutions we support thousands of contractors on our umbrella and CIS services but we understand that for some individuals there are alternatives which may suit their circumstances better. With this in mind some time ago we launched our sister company Exchequer Accountancy Services so that we could offer a complete suite of services and support those contractors whose circumstances change.

So what is the difference between umbrella and a limited company?

Perhaps the key difference is that on an umbrella scheme you are officially an employee. If you set up a limited company you will be running your own business with all the freedom and responsibility that comes with it.

As a contractor working out whether you should register as an umbrella employee or set up a limited company can be a difficult choice. For some individuals it is clear which approach would work best for them but for others it is more of a grey area.

It’s an important choice, one which can make a difference to the way you work, your job satisfaction, stress levels and how profitable your work is.

There are various factors to consider but one reason it is sometimes a difficult decision to reach is that contractors don’t have a crystal ball. It is hard to predict exactly what you might earn in the future and to know if you will be lucky enough to move seamlessly from one contract to another or will have spells in-between where you aren’t earning.

As a general rule the following applies:

Do you earn above £25,000?

No – umbrella is probably the best option for you

Yes – Consider setting up Ltd company to operate in the most tax efficient way

Your earnings will give an indication of whether you could be financially better off operating a ltd company but the decision between umbrella vs limited company isn’t just a financial decision. Here are some things to think about when making a decision between umbrella or limited company.

Umbrella

  • All your tax is taken care of by the umbrella provider on an ongoing basis. No tax returns and no tax bills at the end of the tax year
  • No unexpected tax bills
  • You can claim legitimate expenses
  • There is very little administration involved
  • You will be paid weekly and won’t have to chase payments
  • You benefit from all the rights that come with employment such as sickness pay and maternity/ paternity benefit
  • You will have a contract of employment which can make life easier if you are trying to get a mortgage or loan

 
Limited

  • You are your own boss, you have the flexibility to work when you want and where you want
  • Limited liability, your business and personal finances are kept separate. So if the worst happens and the limited company runs into financial difficulties your personal finances and possessions are not at risk
  • As long as you keep track of all your costs and expenses it is usually the most tax efficient approach so you could reap financial rewards from going limited
  • As a Director of a limited company you have certain legal obligations such as delivering statutory documents to Companies House as and when required by the Companies Act. These include: submitting accounts & annual returns, giving notice of any change of directors or secretaries. It is also usually down to the directors to give notice of a change of registered office.

 
In addition to producing proper accounts and sending the required documents to Companies House you must:

  • Comply with the law on areas such as health & safety, employment law and tax
  • In some instances you may be responsible for the actions of your employees (if you have any)
  • Remember as a director you are legally responsible for your company’s records, accounts and performance

 
If you think that limited is the approach for you then our sister company Exchequer Accountancy Services can help and support you throughout the process. Keeping track of your company’s accounts can be daunting if it is new to you but a good accountancy service will do the hard work for you and ensure you stay on track. Exchequer Accountancy Services specialise in supporting contractors and have a wealth of experience in this area. We work closely with them so if you are currently on our umbrella service we can help with the transition.

If you prefer the security and support of an umbrella service then you can register direct on our website or give us a call. We have thousands of contractors on our umbrella service who have chosen umbrella because it suits their circumstances and leaves them free to focus on their work and securing new contracts.

If you are unsure which approach is right for you we would be happy to discuss your individual circumstances with you.

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