What is the Difference Between an Umbrella Company and a Limited Company?

by Atlantic Umbrella

4 February 2019 Category Umbrella News
4 February 2019, Comments 0

As a contractor, one of the first decisions you have to make is how you want to structure your business and arrange how you get paid. If you have previously worked full-time at a company and were on the payroll, you may be unfamiliar with the options available to you now that you are working on a freelance basis. The two most common routes are: 

– Become a one-person limited company

– Use an umbrella company 


But what do these options entail? We have laid out a simple side-by-side comparison to give you a clear insight into both choices. 


Limited company 

If you establish yourself as a limited company, you become the director of that company. Consequently, you are responsible for all company transactions. You will need to be completely on top of everything regarding compliance and other statutory matters, which include: 

– Company law requirements to file accounts and returns to

– Companies House Calculation and payment of corporation tax liabilities 

– Payroll calculations and returns 

– Any other statutory and Government requirements


You will be in charge of raising all company invoices which will require you to establish an accounting system to keep track of any transactions that take place. You will also have to appoint an accountant who will be tasked with accounts, taxation and payroll matters.  


Choosing the right accountant is vital when operating through your own limited company. Make sure you choose a firm that specialises in contractor limited companies. You’ll be surprised at how many don’t! A bad choice of accountant can cost you and your company dearly. 


Umbrella company 

An umbrella company is also a limited company, however, in contrast to the option of setting up your own limited company, you do not become a director or shareholder of the umbrella and so would not take on any of the responsibilities listed above. An umbrella company handles all accountancy, payroll and taxation matters in relation to your engagement with them. The umbrella company also takes care of the administrative affairs listed above, meaning you as the contractor need not worry about them. 


The process is more streamlined, with the umbrella company engaging you as their employee and you submitting a timesheet as you work. They invoice the recruitment agency or end hirer and when payment is received, they subsequently pay you. 

Exactly the same as with your own limited company, the rate charged by an umbrella company to recruitment agencies or end hirers in respect of your work is not your salary; it is the company’s income for the supply of your services.  

From the umbrella company’s income it must provide for its margin and all costs relating to your employment. These costs may include employers National Insurance, employers pension contributions, basic pay, holiday pay and the Apprenticeship Levy. 

Any remaining company income after consideration of all employment costs relating to your employment is usually paid to you by the umbrella company as a bonus or commission.  


Advantages and disadvantages 

There are, of course, pros and cons to each way of doing things and you should be aware of them before making a decision. Your own limited company gives you control, which means control of revenue as well as having the money paid directly into your own company’s bank account. You will also be directly responsible for all payment and admin processes, which can be positive if you have the time to ensure that you can be efficient and organised. There can also be a smaller tax burden – for example, if your contract revenue is earned outside of the IR35 legislation 


However, despite these positives, the negatives can also be significant; namely, the sheer volume of administration and paperwork, especially when taking into account late filing or payment penalties that are often incurred. You are also responsible for all day to day matters regarding invoicing and the rest of the admin that comes with it. Money that is saved on taxes will often go on an accountant who will also require your time to liaise over forms, returns and accounts.  


Umbrella companies can also have their drawbacks; there can be delays in receiving money if the umbrella company’s processes are inefficient. There also has to be trust between you and the umbrella company you choose to engage with. You will be placing your trust in a company to look after you and ensure that you receive all the benefits to which you are entitled to as an employee. These potential drawbacks can be addressed by engaging a reputable, FCSA accredited umbrella company.  


With an umbrella company, there is usually an initial, very simple on-boarding process, after which the only thing you need to do is forward on your authorised timesheets. The umbrella company will then ensure that the recruitment business or end hirer is invoiced and that you receive your pay and employment rights. You do not need to worry about VAT returns, company accounts, payroll and taxation. 


A final advantage of choosing to engage with an umbrella company, especially for short-term contract assignments, is that if you wish to move on to something new, you don’t have to go through the expensive and time-consuming process of forming a company only to have to dissolve it. You simply terminate your employment with the umbrella company in the same way as you would with any other employer and move on. 

If you would like to know more about the benefits of using an umbrella company, please contact us on +441582 349 569 or fill out the form on our homepage.

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