A significant decision every contractor must make is whether to operate through an umbrella company or a limited company. Both options have advantages and drawbacks, and the right decision for you will depend on your circumstances and goals for 2025.
Your decision will impact many aspects of your career, affecting finances, IR35 and your time, so it’s essential to do your research.
To help, Umbrella Search has put together this guide outlining everything you need to know about umbrella companies vs limited companies and which will be best for you in 2025.
What Is an Umbrella Company?
We’ll start by explaining what an umbrella company is.
An umbrella company is a provider that acts as an intermediary between the contractor and the client. The umbrella company will employ the contractor, which in turn means that the contractor is put onto the umbrella company's payroll. This ensures that their taxes and national insurance are paid through PAYE, which means they're always correct and up to date.
Being employed by the umbrella company also means that contractors are eligible for statutory benefits such as holiday pay, sick pay and maternity or paternity leave.
What Is a Limited Company?
Operating through a limited company requires the contractor to set up their own company on Companies House.
As such, you will be required to take on the tasks involved in running a company, including filing your company accounts, handling company and personal taxes, filing a confirmation statement annually, as well as adhering to director’s duties.
Which is the best option?
Taxes
When working through an umbrella company, contractors' tax affairs are taken care of.
As they are on the umbrella provider’s payroll, the umbrella company pays their salary deducting the correct levels of tax and National Insurance, meaning you’re always up to date with taxes.
On the other hand, when working through a limited company, contractors must plan and file their own taxes. Usually, you will have to file personal tax returns through a self-assessment, as well as company accounts and a corporation tax return. You will need to plan well to ensure that you set enough aside to cover the tax bills when they come, as you will be paying taxes annually and retrospectively.
Although this is a downside for contractors, meaning they have to spend time planning and filing tax returns, which often requires the help of an accountant and an extra outgoing, it does mean you can make your earnings a little more tax efficient.
Many limited company contractors will pay themselves a small salary, topping up their income through dividend payments. This means you can pay slightly less tax as dividends are taxed at a lower rate, but it does mean you will need to plan well to ensure you can survive off a small monthly salary and top this up quarterly or in line with your dividend payout schedule.
Admin and paperwork
An umbrella company is the easiest and most hassle-free way to contract. Taking on admin tasks such as payroll, taxes, expenses and insurance, this leaves the contractor with more free time to focus on the work at hand. This makes an umbrella company a great option if you want to free yourself of the endless headache of admin.
Running a limited company requires a little more effort, however. The contractor will need to keep records and receipts, file company accounts and confirmation statements, and deal with all the administrative issues arising from the specific contract at hand.
Holiday and sick leave
As an employee of their chosen umbrella company, contractors are entitled to statutory benefits such as holiday pay, sick pay and maternity leave or paternity leave.
This means that when you take time off for a break, or if you’re too ill to work, you will be paid statutory sick pay or holiday pay as a minimum which offers much needed peace of mind for contractors.
Limited company contractors don’t receive these benefits as they are self-employed, meaning if they wish to take time off for whatever reason, they won’t be paid.
IR35
Every contractor will have heard of infamous IR35 legislation. Many contractors use an umbrella company to avoid the stress and hassle of IR35. This is because umbrella company contractors are treated as employees, meaning that they are automatically inside IR35. In turn, that means no worries over potential fines or costly investigations.
On the contrary, contracting through a limited company means that IR35 compliance is the contractor’s responsibility. This means that if HMRC deems that the contract you are working on is inside IR35, you will lose the tax advantages of working through a limited company and could face penalties.
For this reason, many contractors consider the umbrella company route the easier and safer option against IR35.
Umbrella company vs limited company: which should I choose?
Having learnt about the pros and cons of both option the next step is to decide which is best for you.
Should I choose an umbrella company?
An umbrella company will be the best option if:
- You want to simplify finances and taxes
- You want to benefit from statutory rights like holiday and sick pay
- You want to avoid any IR35 headaches
- You want less time focusing on admin and paperwork
Should I choose a limited company?
A limited company will be the best option if:
- You want to run your own business
- Your contracts fall outside IR35 and you don’t have concerns over this changing
- You want to pay yourself in a more tax-efficient manner
Considering an umbrella company? We’re here to help
Having read our guide to umbrella company vs limited company, many contractors will decide that an umbrella company is the way to go. If that’s the case, Umbrella Search is here to help.
Simply get in touch with our friendly team and we’ll take care of the rest, finding the best umbrella company for you. Get in touch today and start 2025 right with Umbrella Search.
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