Limited company or Umbrella company – part I

When starting working as contractor you have to decide how you want to run your business. You can either set up a limited company or decide to work under an umbrella company.

You have to design your business in a way that allows you to make maximum income while paying minimum tax and the one that allows your clients to communicate with you easily.

Limited company

Working through a limited company has many benefits over using an umbrella company. It’s relatively easy to set up your own business and there are many tax advantages.  Even with PAYE (pay-as-you-earn) and umbrella companies now offering a viable option, majority of contractors still prefer going the limited company way and taking all the control in their own hands.

Setting up a limited company

Many people think that there is a lot of hassle involved when setting up a limited company. However, there are number advantages of a limited company which make this option far more appealing.

To setup your own limited company, you can complete the whole process online. It will just take a few hours and there won’t be any hassle if you have chosen a decent company formation service.

It can be started with 40 pounds only by sending papers to Companies House and 13 pounds if registered online. After setting up the company, you will become director of the company and fully responsible for financial matters. You will have to meet with HMRC tax deadlines and submit annual accounts to Companies House.

Why choose Ltd?

Simply put, with a limited company you are the director of your own private company. You have complete autonomy of how you work and who you work with. As a director you are fully in control of your own business and its financial affairs – this allows for greater opportunities for tax planning including drawing dividends, claiming expenses and making pension contributions

The tax advantages of working this way outweigh any other compliant method and you remain in control of your own finances.

Setting up your own limited company provides you maximum freedom and control over your financial matters.

If you are not caught by IR35 tax, you can enjoy maximum tax benefits by setting your own limited company.

It allows you to introduce new investors and shareholders in the company.

Paperwork and invoicing

There is more paperwork associated with running your own business and you’ll need to spend time invoicing your clients and claiming your expenses each week for the work you do, however, this is similar to the work you have to do to submit timesheets and expenses with most compliant UK umbrella companies.

If you’re considering staying in this type of work for a longer period of time, appointing a specialised contractor accountant will be a solution.


The main benefit of starting to work through your own limited company will be an increase in your take home pay.  This is achieved by withdrawing your company profits in a tax efficient manner through a combination of salary, expenses and dividends. Your own income will be approximately 80% of your turnover, while with an umbrella it may only be around 70%.  This is largely due to the reduced level of National Insurance contributions you make as a Limited Company director, if withdrawing funds in a tax efficient manner.

Operating through your own business also affords you with a degree of protection in the form of limited liability, meaning your personal assets are not at risk should your business fold.


Using a limited company means that as contractor you can use tax advantages. There is a full control of how you invoice the clients for and how you go about paying yourself. Due to the nature of the tax laws surrounding running a limited company, it is possible to do this in a far more tax efficient way. Paying via dividends allows you as a director to counter the higher rates of tax levied on personal income tax.

There are several other advantages which allow the contractor with a limited company to be tax efficient and thus maximise their take home money from contracting work. Clearly this includes the ability to reclaim tax on company expenses among other things.

Disadvantages of limited company

Setting up a limited company will be costly if you are contracting for a short period of time.

If the contract jobs you take are caught by IR35 rule, you can’t take any benefit through setting up your limited company.

While there are advantages of being a director, you also have the additional responsibilities to HMRC and Companies House; which includes paperwork and financial management. To solve this problem, you should hire a specialised contractor accountant – which typically costs some fees.