What’s the Difference? Umbrella vs Limited vs Self-Employed

Common questions asked in the umbrella industry both from agencies and contractors is “what’s the difference between an Umbrella and a Limited Company?” and “why should I choose one over the other?”  Allow me to explain the Pro’s and Con’s of both solutions and for good measure, I will throw in Self-employed too!

Let’s start with the most complex model available, a Limited Liability Company / Personal Service Company/ Ltd Co (it has many names!) is exactly that, it’s a registered business in the UK. You will have registered the business name at companies house and depending on the amount of revenue, you may need to register for VAT. As it stands it’s currently the most tax-efficient model in the UK. However, the dark side is that this model has the most restrictions and legislations placed on it than all of the other solutions. Have a look at the Pros and Con’s:

Pros of using a limited company

  • Most tax efficient model
  • Limited liability meaning your personal assets are protected
  • Professional appearance to clients
  • You have full management of your cashflow
  • Legitimate business expenses are tax deductable

Cons of using a limited company

  • Accountancy knowledge needed or a personal accountant (additional cost)
  • Not legal for everyone (IR35 Rules)
  • Professional indemnity insurance required at a minimum (additional cost)
  • You have full responsibility for tax payments and penalties
  • You have no employment rights
Storslagna idéer är inget som skrämmer entreprenören. Ju galnare desto bättre!

Umbrella Company:

An umbrella company or intermediary is a business that provides contractors with an employment vehicle that manages their tax and national insurance payments as a service. It’s popular in the recruitment sector as it allows a great amount of flexibility for contractors without undertaking a large amount of responsibility. Umbrella employees (contractors) also gain access to all the rights provided by the Employment Rights Act 1996. For contractors, this solution is ideal as it meets all legal requirements set by HMRC and poses no risk to the contractor while adding greater protection for the workers compared to other solutions.

Pros to working via an Umbrella Company

  • No tax administration as all managed by the umbrella company
  • Access to auto-enrolment pension programs
  • Continual employment record even when you’re not working
  • Compliant with HMRC tax rules
  • Outside of the scope of IR35
  • Employment rights included

Cons of working via an Umbrella Company

  • Not the most as tax-efficient
  • Limited access to expenses claims

Self-Employed:

While self-employment is very common in the UK, its not so common when assignments are engaged via the recruitment sector. To clarify, self-employed individuals are not working via a limited company they are registered with HMRC as an individual and will complete taxes via a self-employment tax return annually. This solution is ideal for those with a small or independent business.

Pros to Self-employment

  • Can claim work-related expenses
  • You have full control of cashflow
  • Class 2 or Class 4 National Insurance contributions
  • Efficient tax structure for all individuals

Cons to Self-employment

  • Your personal assets are at risk, no protection against claims
  • Accountancy knowledge needed or a personal accountant
  • You have no employment protection
  • Not accepted for assignments engaged by recruitment agencies (False Self-employment law)


    Conclusion
    As you can see each model has it’s unique benefits and drawbacks. These mainly relate to the way you source your assignments. With the ever-changing landscape in the UK from a legislation perspective. The umbrella company will suit all types of individuals regardless of how you source your assignments.