Limited Vs Umbrella: Which Should You Choose?

As a contractor, you can operate two different ways: as your own limited company or under a PAYE umbrella. Both options have a number of pros and cons depending on your contracted situation and your level of willingness to take on responsibility. If you are unsure about which route is right for you, contact Aston Black Accountants for sub-contracting advice. What is the difference between Limited and Umbrella?

Forming your own limited company

Limited company contractors have the potential to receive more money than those working with umbrellas, however there is a lot of associated administration with this. You will be self-employed and required to operate as an independent business.

You will need to establish your own limited company and business bank account. You will then become the company director, which means that you are in charge of your own accounts, taxes and salary. You are also responsible for your own invoicing, conducting your own IR35 reviews, and keeping detailed records of all business dealings. However, you can also hire a Aston Black Accountants to handle the statutory obligations of running your limited company for you.

This is the most tax-efficient way to operate. You pay yourself in the form of a basic salary, and the rest is drawn down into dividends. Dividends are not subject to National Insurance contributions, which results in a tax saving. You also have a lot of flexibility over when to take income out of the limited company, which has further tax benefits.

Contracting through a PAYE umbrella

Working under a PAYE umbrella means that payment of your salary will be the responsibility of your umbrella company, which takes the burden of responsibility from you and acts as your employer. You submit a timesheet to the umbrella company, which then pays your salary with tax and national insurance deducted, as well as any umbrella-fees and agreed upon deductions.

This is not as tax-efficient as forming a limited company, however it is a lot simpler – as you are not in charge of running your own business, and simply get paid by the entity acting as your employer. Contracting through a PAYE umbrella may appeal for those taking on short-term contracts or who do not want to take on any form of administration.

Compliant umbrellas provide you with a contract of employment. This means you’ll have access to all the rights and benefits given to permanent employees, including holiday, sick and maternity & paternity pay. You won’t have to worry about IR35 either, as umbrella contractors aren’t affected by the rules.

Need more help? Aston Black advises freelance contractors to make the best decisions for their careers, so they can get back to doing what they do best.