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Umbrella vs. Limited: The Great Debate

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Umbrella vs. Limited: The Great Debate

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 umbrella and limited status here, or you can give us a call on 0161 669 4221 if you’d like to have a chat with our team.

To book in a FREE consultation, contact us today on 0161 669 4221 or info@biaccountancy.com.

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