Limited Company vs PAYE Umbrella: Which is Right For You?
As someone who is self-employed one of the biggest decisions you have to make is whether you set up as a limited company or you work through an umbrella company.
This decision is based around your own specific requirements and how you want to operate as a contractor.
There are both fantastic benefits and some potential drawbacks for both options. So the question is: which is the right one for you?
Set Up – To set up a limited company you have to register your business’ name at Companies House. Once this is done, your business is now legally a separate entity to yourself, meaning that you won’t be personally liable for any company debts and financial issues.
Starting work under an umbrella company is even easier to set up. You simply sign a contract with the company, then submit a timesheet so they know how much to charge the client for your services.
Managing your finances – When working as a limited company, you’ll be solely responsible for the filling out, organising and submitting all of your financial paperwork. From filing your tax return to managing client invoices, the administration of your business will be completely down to you, although you can always hire a specialist contractor accountant to help if need be.
In an umbrella company, they will take care of all this paperwork, leaving you with more time to concentrate on actually doing your job.
Take-Home PayWhen working as a limited company, you avoid the cost of umbrella margins and you can also benefit from all kinds of tax efficiencies. Generally speaking, contractors operating as a limited company tend to take home more money. In fact, the average limited company stands to make 20% more than their umbrella company counter-parts.
However, umbrella companies take a lot of the hassle out of self-employment. By taking care of your tax payments, NICs and processing invoices, they significantly reduce the stress caused by admin and paperwork. However, the financial rewards perhaps aren’t as great as those available to limited companies. Since an umbrella company will take a chunk of your earnings to cover their services, your take-home pay will inevitably look different in comparison to working as a limited company.