Why Should You Choose an Umbrella Company Over a Limited Company

When functioning as a consultant, independent contractor, or specialist, you’ll immediately run into how you should be paid. As you won’t be on either of your clients’ payrolls, you’ll need to find different provisions for the same. 

In a nutshell, being self-employed involves working entirely for yourself. Your bills will be made under your own or a trading name, and the taxes will be under personal income tax rates. It’s a less popular approach in most professions because you don’t get the lower tax rates that come with running a Limited company.

And speaking of taxes, accountancy firms like WIS Accountancy or others in the UK will help you make the tax payment process easier.

But what about an Umbrella company? Is it any different from a limited company? Also, is switching to an Umbrella company from a Limited company viable? Let’s find out below!

Limited Company – An Overview

A limited company or corporation is an independent entity wherein you operate as a director and investor. The corporation will have its bank account and assets because it is a separate legal entity from you. Agreements would be between your business and your customers or clients, and any profits or losses will be solely of the organisation. 

The name ‘limited’ company comes from the concept of limited liability. This states that the firm’s owner, you, in this case, cannot be held personally responsible for any liabilities or debt payments that the company incurs. Hence, if something goes wrong, borrowers can claim the business’s assets, but your assets will always be safe.

A token amount is required for forming a Limited company in the UK and registering it with Companies House. There are several reporting obligations as well.

Accounts, along with other administrative documents, in a limited company must be submitted every year. There are also certain yearly targets for paying Corporation Tax, which is currently charged at 20% of the business’s profits after all expenditures are deducted. And this is where an accounting firm like WIS Accountancy can help.

Umbrella Company – An Overview

An umbrella company, which typically works through a recruitment agency, acts as a supervisor for independent contractors/consultants on short-term contracts. It serves as an employer across numerous contracts where the contracts are made between the umbrella company and your clients, and the umbrella company pays you as an employee with the help of the PAYE method.

Suppose you sign an agreement with an umbrella company. In that case, you will be obligated to all statutory benefits from the company, including maternity and paternity leaves, sick leaves, a government pension scheme, and paid holidays.

Many umbrella companies also provide non-legal employee benefits such as insurance options, private medical coverage options, access to regular counselling and other social benefits.

Because umbrella company workers get paid through the PAYE system, there are no supplementary reporting essentials to be followed. For instance, all your taxes will be subject to deductions at source and declared to HMRC each time you will be paid, similar to a permanent employee.

Why Choose an Umbrella Company?

If you wish to choose the lowest-admin option, it’s preferable to be compensated through an Umbrella company. The business will process a bill to your client for your work on a previously agreed-upon schedule (usually weekly) and then process your payout through the PAYE method. They will also take care of your annual tax, financial reporting, and National Insurance.

Also, the company will take a cut every time the client pays you. For this, you may be required to file a weekly logbook, which is the extent of the work you will be needed to put in to get paid by the umbrella company.

Conclusion

It’s totally up to you whether you should go for a limited company or an umbrella company. However, to make the process easier, getting help from a professional is better. However, no matter the kind of company you get acquainted with, it’s better to keep the company accounts secure and proper.

Hiring the right accounting firm in such cases can make the whole procedure straightforward. If you are in the UK, firms like WIS Accountancy can be the correct choice. Alternatively, you can also search for other relevant options online.

Adam Hansen