Difference between a limited company and an umbrella solution?

The modern business marketplace offers increased diversification and opportunities to move away from ‘traditional’ models of employment, contracting, and business. Therefore, an essential consideration for many contractors should be which business structure would benefit them more and which can they work as, their own limited or through an umbrella solution?

As leading contractor accountants, it’s a question we are regularly asked at ICS Accounting, so we’ve put together a quick guide that highlights the significant differences between limited companies and an umbrella solution, plus the pros and cons of each. Then, when you’re ready to take the first step, our team of accountancy experts are available to answer questions and offer advice tailored to your individual needs.

Limited company

A limited company is a registered business in the U.K. and currently the most tax-efficient business model for contractors, subject to IR35. A company director would usually pay themself in the form of a basic salary, with the remainder drawn down as dividends, which are not subject to National Insurance Contributions, resulting in a tax saving. You also have flexibility over when to take income out of the company.

However, it has more restrictions, legislation, and statutory obligations than other business models, such as annual accounts submissions to Companies House and HMRC tax deadlines, including Corporation Tax. Depending on the amount of revenue, VAT may need to be registered for. As a director, you will be responsible for ensuring all filing deadlines are met and taxes are paid on time.

Fortunately, as specialist contractor accountants, we can provide advice and handle ongoing administration accordingly. An accountant will also undertake several other initial tasks, such as setting up the company payroll and registering the company for Corporation Tax and VAT.

Limited Company – Pros and Cons Highlights

PROs

– Most tax-efficient way to operate
– More control and flexibility for tax planning opportunities
– No risk to personal assets
– Professional image for clients and employers

CONs

– Administration
– Reduced privacy- fully public company accounts and records
– More statutory obligations and administration responsibilities

Umbrella solution

An umbrella solution can be offered by a provider such as ICS Accounting which acts as an intermediary between contractors and an end client. The umbrella company employs the contractor and deals with payroll and taxation administration, meaning you don’t have to take on the cost, responsibility and obligations of setting up and running a limited company.

You complete and submit timesheets to an umbrella company. They will then collect payment from your client and pay your salary and income tax, NIC to HMRC.

This simplicity of operation means that umbrella companies provide an easy, low-risk solution for those new to contracting, ‘testing the water’, or those working on typically short-term contracts. It also serves as a single employer throughout multiple assignments. Contracts are between an end client and the umbrella solution provider, which pays the contractor as an employee through the PAYE system.

Umbrella solution – Pros and Cons Highlights

PROs
– Easy to join, fast set-up, peace of mind
– Simple to use, minimal admin and responsibilities
– Entitlement to full statutory employment benefits
– Seen as more professional and attractive to end clients than self-employment
– Continuous employment

CONs

– Less tax-efficient than a limited company
– Less direct control
– Potential perceived status compared to limited company contractor

Limited or umbrella solution – Which is better for me?

Just as with business – and life- there is no one-size-fits-all solution. Working through a limited company is very different from working through an umbrella solution, and different solutions will be beneficial for different times of life, size and type of business, and personal situations, not forgetting IR35 status.

ICS Accounting is committed to providing our clients and umbrella employees with the best, most up-to-date expertise and guidance to make an informed decision based on all factors, including new IR35 implications. Whichever a contractor chooses, they can rely on our different accountancy solutions to ensure monetary operations run smoothly.

Our contractor accountancy pages are packed with advice and information on our FCSA accredited limited company and umbrella solutions so that contractors can explore their options in more detail.

To discuss individual requirements with one of our friendly team of experts, or for no-obligation advice, call 0800 195 3750, option 1 or email info@icsuk.com.