Umbrella companies vs Limited Companies
What is an Umbrella Company?
An Umbrella Company acts as an employer to independent contractors or freelancers, usually through a specialist employment agency or recruitment agency.
Pros
- The process is simple.
- The Umbrella Company takes responsibility for invoices, paperwork, collection of money due and payments. This means that all the paperwork is done for you.
- All you need to do is enter your timesheet and expenses details then wait to be paid: effectively you become a PAYE employee again.
This makes signing up a short-term option between longer phases of permanent employment, or for those contractors who prefer not to get involved with any paperwork and be less in control of their financial affairs.
Image by Leslie Duss (flickr.com)
Cons
- Most will insist on a minimum time period you must stay with them or a minimum level of charging. It is advisable to stick with fixed fee companies (who should charge about £30), as those that charge on a % of invoice basis are likely to end up ripping you off.
- It is difficult to see through the promotional jargon but be wary of companies referring to ‘special dispensations’, which imply you can claim more expenses by using their services. In reality expenses are subject to Tax Law and you can only claim for items that you have actually purchased.
- For most individual contractors umbrella companies offer few benefits particularly in terms of reducing their tax liabilities and could actually increase costs, as service fees may reach as much as 9% of the value of the contract.
- You can save on National Insurance as with an umbrella company you will pay both employees and employers NI (Employers NI is 12.8% of your salary, and employees NI 11%).
Limited Company vs Umbrella Company
If you are freelance, a contractor, have a small business or start up business, a Limited Company, is more likely to maximize income. Typically you could take home 80% of what you earn. When you compare that to the typical 65% of earnings you receive through an Umbrella Company suddenly managing your accounts doesn’t seem so bad! A good contractor accountant will help you manage any bookkeeping such as invoices and expenses plus maximise your income.
Related Crunch Guides:
Should I start contracting?
Choose the right contractor accountant
Should I go Limited?
How to set up a Limited Company
How to open a Limited Company bank account
Pros and Cons of being a soletrader
Standard rate VAT or flat rate VAT scheme
Guide to online software
