Umbrella or Limited company, which is right for me?

As a first time contractor, you will need to make many decisions, but the first important one will be how you choose to trade.

Deciding whether to trade through your own limited company or through an umbrella company may seem like a difficult decision at first, however, for most people it usually becomes very apparent which one will suit them and their needs best.

Here is a break down of everything you need to know about umbrella and limited companies:

What is the difference between a limited company and an umbrella company?

By setting up your own limited company, you have complete control over the running of the business and any financial affairs, as you will become both a director and a shareholder of your company.

Despite being wholly responsible for the running of your business, it is worth noting that you are seen as being completely separate to the company, so should your business come across any financial problems at all, you’re personal money and assets are not put at risk.

Working through an umbrella company basically means that you have less control (and therefore less responsibilities) than a limited company contractor. Your client or agency will pay the umbrella company that you trade through, and the company will then pay you. Because of this, you are essentially seen as being an employee of the umbrella, which means that you will need to pay the same National Insurance Contributions as a permanent employee.

For many people, the idea of running their own business can be quite daunting, especially if they have no experience of working in the contracting sector. Trading through an umbrella company first can be a great way for contractors to gain some experience before taking on the responsibility of running a business.

Money, money money!

For many people, one of the main reasons why they decide to become a contractor is due to the fact that they can potentially earn more money than a permanent worker in the same job role.

When it comes to the earning potential of the two methods of contracting, running your own limited company means that you are more likely to take home more of your take home pay.

For example, on average, a limited company contractor can expect to take home around 75-85% of their earnings. This figure is much lower with regards to an umbrella contractor, where you can expect to take home around 60-65% of your earnings.

The reason for this is because a limited company is a lot more tax efficient, due to dividends, being entitled to more contractor expenses and being able to take advantage of certain schemes, such as the VAT flat rate scheme.


For an umbrella company contractor, paperwork will not be an issue, making this is a great choice for those who want to avoid the hassle of filling out paperwork.

As an umbrella contractor, all you will need to do is enter your time sheet and expense details and wait for the umbrella to pay you once receiving payment from your client. You won’t need to work out any tax or National Insurance, as this will all be done for you.

For a limited company contractor however, all of this will be your responsibility – this means taking into account and working out invoices, expenses and book keeping. However, there is always the option of taking on an accountant who will be able to take on most of this paperwork once you’ve provided your figures. Firms like PaperRocket Accounting can also ease the burden or paperwork by providing cloud accounting software eliminating the old fashioned spreadsheet approach and making things even easier for you.

Umbrella vs Limited

Reading through this article should hopefully make it much easier for you to decide which route would work best for you.

Although trading through a limited company may be the most tax efficient method of working, it doesn’t necessarily mean that it will work best for you…

An umbrella company is great for people who are on short-term contracts (less than six months), earn £15 per hour or less (or under £25,000 a year) and who are much happier passing on the reasonability and hassle of paperwork onto someone else.

If you are looking to earn more and work longer than this and you’re not afraid of additional paperwork and responsibility, then the limited route might just be suited to you!

Decide to go Limited?

PaperRocket Accounting can get you up and running with a Limited company of your very own today, sign up here now

PaperRocket Accounting provide accounting and tax services to professional contractors, freelancers, and small businesses working in the UK.

We offer our clients a flexible choice of fixed fee monthly packages which cover all of their accounting and tax needs (so no hidden costs or surprise bills!). All of our accounting packages include a monthly subscription for a cloud accounting software subscription provided by the awarding winning FreeAgent.

Each of our clients is given their own dedicated qualified accountant with unlimited access in person, telephone, or by email.

We pride ourselves on our client satisfaction and customer service and were awarded ‘Best Contractor Accountancy’ firm 2020 in The Contracting Awards and ‘Welwyn Hatfield Business of the Year 2019’ in the SME Hertfordshire awards.

To find out how we can help you please get in touch now.

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