The difference between self employed and limited company vs umbrella company
When you venture out in the business world, one of the first questions you will ask yourself is: “Limited company vs umbrella vs self-employed, what is right for me?” Even experienced agencies and contractors often wonder about the difference between an umbrella company and a limited company. Allow me to explain the pros and cons of both solutions – and for good measure, I will throw in Self-employed, too!
Limited company
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 rLet’s start with the most complex model available, a Limited Liability Company aka Personal Service Company aka Ltd Co… it has many names! A limited company is 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, a ltd company is currently the most tax-efficient model in the UK. However, the dark side is that this model has more restrictions and legislations placed on it than all of the other solutions. Have a look at the pros and cons:
Pros and cons of a private limited company
Pros
- Most tax efficient model
- Limited liability means your personal assets are protected
- Professional appearance to clients
- You have full management of your cashflow
- Legitimate business expenses are tax deductable
Cons
- Accountancy knowledge needed or a personal accountant (additional cost)
- Not legal for everyone (read our guide on IR35)
- Professional indemnity insurance required at a minimum (additional cost)
- You have full responsibility for tax payments and penalties
- You have no employment rights
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. In short: An umbrella company guarantees simple contracting! It is particularly popular in the recruitment sector as it allows a great amount of flexibility for contractors without undertaking a large amount of responsibility. One important difference between an umbrella company and a limited company is that umbrella employees (contractors) have access to all the rights provided by the Employment Rights Act 1996. For contractors, this solution is ideal as it poses no risk to the contractor while adding greater protection for the workers compared to other solutions.
Pros and cons of an umbrella company
Pros
- 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
- Not the most tax-efficient
- Limited access to expenses claims
Being self-employed
While self-employment is very common in the UK, it’s 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 and cons of self-employment
Pros
- 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
- Your personal assets are at risk, no protection against claims
- Accountancy knowledge needed or a personal accountant (additional cost)
- You have no employment protection
- Not accepted for assignments engaged by recruitment agencies (False Self-employment law)
Conclusion: Limited company vs umbrella company
As you can see when comparing limited company vs umbrella company – each model has its unique benefits and drawbacks. They mainly relate to the way you source your assignments. If we exclude self-employment due to high personal risks, the question remains: Umbrella company vs limited company – what is the verdict? A limited company is no-doubt the most tax-efficient solution but it comes with a considerable downside in the form of administrative hassles. With the ever-changing legislative landscape in the UK (IR35!), an umbrella company is the best solution if you want to leave all administration to the experts and fully focus on your work. Regardless of how you source your assignments, Cool Company will take care of your payments, taxation, and employment protection. Learn more about how to get started with your free account.
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