Umbrella vs. Limited: The Great Debate

Google reviews
July 18, 2016
n

Self-employment gives you the freedom to control your workflow, but it also brings decisions about how to operate in the business world. If you’re a freelancer or contractor, you’re probably wondering whether you should form a limited company, or assume umbrella status instead.

Both can legitimise your earnings for the taxman, yet both are subtly different in terms of their pros and cons. Stepping into the ring, we’d like to outline what’s available to you depending on the route you take.

If you’re relatively new to self-employment and unsure about where it will take you, umbrella companies are a popular choice. This path is ideal for contracts lasting a couple of months, acting as a middle ground between a traditional PAYE structure and full-blown business ownership.

You’ll record your hours on a timesheet, just like a regular employee, removing the hassle of invoicing and bookkeeping. Additionally, some organisations offer complimentary advice on pensions, mortgages and investment opportunities.

However…

Umbrella company status brings with it restrictions, most notably where tax relief is concerned. Your claims on travel and subsistence expenditure, for instance, will be limited. As such, it’s likely that your take-home pay will be lower by operating under an umbrella company, compared to that of a limited company owner.

In the other corner – limited company

Going limited really does have immediate, tangible benefits. For one, it’s the most tax-efficient way to make a living: you can take payments as a dividend, and claim plenty of tax relief for viable business expenditure, provided you comply with IR35 regulations.

Control is down to you. You can manage your own salary, expand the venture when you see fit, and take on dozens of clients over however long a period. At the end of the day, you’ll be earning more from your talents, which is a no-brainer for contractors and freelancers who are in it for the long run.

But…

Again, you’re in the driver’s seat. That equates to being on the ball for keeping track of receipts, invoices, and tax submissions. It’s hardly a huge ream of extra work, but it is an extra load to deal with. IR35 rules, similarly, must be paid close attention to, otherwise HMRC could land you with severe tax penalties.

Unless you have a team of trusted accountants, like us, behind you to advise on best practices, tax legislation and more, you could find yourself floundering in the early stages of running a limited company. So make sure you get expert advice.

After the dust has settled, we believe that going limited has an edge over its rival. It’s the best way to achieve true independence and boost your earning potential. Having a flexible accountancy service by your side can smooth out the few wrinkles that remain on the canvas.

We’re here to help you reach your dreams, and decide what shape your business will take. We have more information about the umbrella and limited status give us a call on 0161 669 4221 if you’d like to have a chat with our team.

business concept, business woman confused about two choices. vector illustration.

Resources

Recent Articles

650,000 extra pensioners pay tax for the first time this month

650,000 extra pensioners pay tax for the first time this month

Around 650,000 pensioners are facing the prospect of paying tax on their pensions for the first time from this month thanks to a big boost to the State Pension from April 6, and frozen tax bands that will drag them into the tax net, according to calculations from...

The end of the P11D is expected in 2026

The end of the P11D is expected in 2026

The P11D form which has been used to process ‘benefits-in-kind’ such as loans for season tickets and company cars will no longer be used after April 2026, as HMRC will ask businesses to deal with all these benefits through the payroll instead. HMRC announced earlier...

Cryptocurrency gains must be reported on self-assessments

Cryptocurrency gains must be reported on self-assessments

If you hold or invest in cryptocurrency, or even if your employer pays you in a cryptocurrency such as Bitcoin, you may need to declare this on your self-assessment form. For anyone who didn’t in the 2022/23 form which should have been filed before January 31, it...

Ready to join us?

Whether you’re a contractor, freelancer, or small business, Bright Ideas can help remove the burden of time-consuming and complex finances. We’ll draw on our years of knowledge and experience earned helping sole traders just like you.

When you choose us, you’ll be assigned a dedicated Account Manager who’ll provide one-on-one support that’s customised to your business. Communication is key, so we’ll always answer your questions or requests as soon as we can. In fact, we offer a same-day response guarantee for emails and calls received before 3pm.

Contact us to get started

Give us a call us or send an email today!

Looking to switch accountants?
We make the transition simple.

Does your current accountant give 1-to-1 support? Are they fast and thorough?
Slap-dash services hold businesses back, so try our experts instead.

Move to an accountancy service that goes the extra mile…

Start the conversation

Let’s make your finances Brighter

Call us Monday to Friday 9am - 5pm

0161 669 4221

Request a call back