What is the Difference Between Umbrella Company and Limited Company?

The main differences between an umbrella company and a limited company are the way they handle taxation, employment status, and the level of administrative work involved. Here are the key differences:

Umbrella Company:

• Employment status: As an umbrella employee, you are considered self-employed for tax purposes but have the benefits of being an employee, such as holiday pay, sick pay, maternity/paternity, and adoption leave.
• Taxation: Umbrella company employees are paid through the PAYE system, with tax deducted at source and declared to HMRC each time you are paid.
• Administration: Umbrella companies take care of most of the administration, making it a hassle-free option for contractors.
• IR35: If you are caught by IR35, an umbrella company is an ideal way to contract.
• Suitable for short-term contracts or unsure long-term contracting.
• Disadvantages: Not as tax-efficient as trading via a limited company, little control compared to running a limited company, and hard to reclaim expenses due to HMRC clampdowns.

Limited Company:

• Employment status: As a limited company contractor, you are not considered an employee and do not have the benefits of an employee.
• Taxation: Limited companies are taxed separately from their shareholders and directors, with Corporation Tax charged at 20% of the company's profits after expenses are taken into account.
• Administration: Limited companies require more administrative work, such as submitting annual accounts and other documents, as well as meeting deadlines for paying Corporation Tax.
• IR35: If your contract work is subject to IR35, you may be better off using an umbrella company.
• Suitable for long-term contracting or if you are confident in your contracting status.
• Advantages: More tax-efficient than an umbrella company and provides more control over your business.

In summary, an umbrella company is a better option for those seeking a hassle-free, short-term contracting experience with employee benefits, while a limited company is more suitable for long-term contractors who prefer more control and tax efficiency. Ultimately, the choice depends on your personal preferences, circumstances, and IR35 status.

Comparative Table: Umbrella Company vs Limited Company

Here is a comparison table between an Umbrella Company and a Limited Company:

An Umbrella Company is a good option for those working on short-term contracts, temporary assignments, or unsure about long-term contracting, as it takes care of administration and offers employment benefits. However, it is less tax-efficient than a Limited Company. On the other hand, a Limited Company is more suitable for long-term contracting and those with a consistent workload, offering more control and tax-efficiency. However, it requires more paperwork and administration.