Contractors Umbrella Company FAQ

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Limited Company or Umbrella Company

A limited company and an umbrella company give you the same thing in terms of your contractor ‘status' - both methods of trading give you the obligatory limited company backing that satisfies the client's recruitment policy and both give you the necessary means of invoicing your recruitment agency.

There are differences between running your own limited company and using the services of an umbrella company. The differences can best be summed up by the question on most freelance contractor's mind:

"Will I be better off having my own limited company rather than using an umbrella company?"

The major financial differences between your two options are National Insurance Contributions (NIC) and VAT.

National Insurance Contributions

Using the services of an umbrella company means you'll be charged not only Employees NIC, but also Employers NIC.

Employees NIC starts at 11% and Employers NIC is 13.8%. Both these charges will come out of your gross income, after your tax free personal allowance has been taken into account.

If you use the service of an umbrella company and you are earning, say, £300 a day you will have to pay approximately £250 a week in NIC. With the same daily rate, but trading through your own limited company, you will only pay £30. Using this example, your NIC savings will amount to £10,000 in a normal year where you work 46 weeks.

The higher your daily contract rate the more you will save in NIC payments.

Umbrella Company

An umbrella company is ideal for short-term contracts and for those who are happy to pay a little bit more tax in return for no paperwork at all. An umbrella company is the simplest and most straightforward way to handle contract administration & paperwork.

Limited Company

A limited company is the best option for those contractors who have longer term assignments and for those who want to reduce their tax bill and maximise their net take home pay.

VAT Flat Rate Scheme

The government incentivise small businesses and simplify their own administration by allowing limited companies to operate a Flat Rate VAT scheme.

Your limited company will issue invoices that charge VAT at 20% of the gross invoice amount, but you only have to pay back to HMRC 13.5% VAT in your first year of trading. The VAT rises to 14.5% after that, but it is still substantially less than the VAT you charge to your recruitment agency.

On a daily rate of £300 you'll earn at least an extra £3,000 a year.

Running your own limited company has other benefits. You'll earn interest on the money that is in your company bank account and there is a wider range of business expenses you can claim.

If you're earning £300 a day you could be taking home about an extra £10,000 a year. So even though the taxes (income tax/corporation tax) will be roughly the same between the limited company and umbrella company option, the limited company contractor has additional benefits in the form of VAT and NIC.