Umbrella vs Limited – analysing the differences

You may have come to the crossroads of choosing between Umbrella and Limited and not being sure of the differences between the two and how your working relationship would work.

Both have drastic changes to how you go about your finances and it’s vital that you understand what your role is.

Umbrella

An Umbrella company acts as an intermediary between you and any client you work with.

They essentially become your financial admin, they’ll get paid by the client for the work that you do, after you submit timesheets.

Then after taking a small fee for their work, you’ll receive your wage, with all tax deductions already done for you.

People take this route when they don’t want to worry about doing any financial or account work while contracting.

Limited

Limited companies are official companies that you set up yourself, as a director.

Meaning you’re completely in charge of the company, being legally separate from you as an individual.

Many people choose to hire specialist contractor accountants when setting up Limited companies to ensure that their finances are in order.

Are You Suitable?

Whether you prefer one or the other, Umbrella or Limited are more focused towards people in certain situations.

Umbrella usually are great for contractors who are on shorter-term contracts, don’t want the admin work, earn £15 per hour or less and still want some employee benefits such as sick pay and holidays.

Limited is for contractors that generally earn more than £15 per hour, aiming to be contracting for over six months and happy to do a lot of admin work.

Tax

Umbrella and Limited also differ in the way that tax is calculated. For Umbrella, all your earnings are paid straight to the Umbrella company itself from the client. It’s then their job to ensure that the amount of tax and NI is calculated on a PAYE basis. For Limited, all your earnings are paid directly into your business account and then it’s up to you to choose a tax efficient mix of salary and dividends.