Umbrella Company Or Ltd Company? Which one to go for?

If you're new to contracting, you may be wondering whether to go for a Ltd company or an umbrella company?

A Limited company is a company with at least one director, one company secretary. Basically, it offers you limited liability to the owners. However, the tax people tried to crack down against contractors who were basically "personal service companies" i.e. one-man companies. Read up on "IR35" if you want to know more.

However, the handful of test cases that have occurred so far have seen HMRC fail to win. So does this mean its safe or legal to do? I'm not a financial or tax adviser so can't advise you on that. To a great extent, it's a matter of opinion.

On the one side you have tax people saying that a one-man company is just a ruse to save tax (you only pay corporation tax on dividends that you draw, instead of income tax on all your income). On the other hand, you have Ltd company contractors saying that it's perfectly legitimate that contractors can limit their liabilities as a company as a legitimate business need and that they are not like normal employees who have greater job security.

As you can see, running a company can be some headache, even before you consider the costs of having an accountant administer it. If you just want simplicity, the alternative is an umbrella company.

An umbrella company acts as your employer. They invoice your agency and get paid via them. They then pass the money on to the contractor as an employee.

It works out still to be worse than being a full-time employee of the agency. Why? Because first the umbrella company deducts a fee, around £30 per month. Second, employers are obliged to pay National Insurance to the government. So in this arrangement, the umbrella company makes you pay that instead (they're not a charity after all!).

Why not just go direct with the agency? Well, these days, few agencies have an employee payroll for contractors who get work via them. They just don't want the hassle and the overheads and it's easier for them to be invoiced and make payments instead.

So which should you do? Umbrella company or Ltd company? It's up to you. There is no "wrong" or "right" way. I know people who are risk averse and will only use an umbrella company. I know people who use a Ltd company and cannot understand why anyone would use an umbrella company and take home much less money.