Choosing a company structure, Limited or Umbrella?

Choosing a company structure, Limited or Umbrella?Making the decision to go it alone and work for myself as a contractor was quite a liberating experience. I had become fed up working for lousy bosses and knew I would find the world of contracting so much more rewarding. Not to mention, I liked the idea of being my own boss, calling the shots and not having anyone to answer to.

But before I started my new journey, I had a few things I needed to work out. . .  one of the most important things being my payment structure. The main two options I had was either setting myself up as a one person limited company or go down the umbrella company route.

Operating under an umbrella company initially looked like the easiest thing for me to do, because you don’t have to worry about the paperwork involved with tax and invoicing. Basically an umbrella company acts like an employer for freelance staff or contractors, which effectively means I would become a PAYE employee. So before I receive payment, all National Insurance and tax is deducted for me, with the umbrella company invoicing the client on my behalf. For someone who had never been self employed before and had not even used Excel, this seemed like quite an attractive option. However, I feared becoming a PAYE employee again meant I would lose a lot of the freedom that I hoped I would get from going it alone. Although they would be handy chasing overdue payments, it also meant my money would go from the client, to the umbrella firm, then onto me!

I spoke to a few friends, who have used the umbrella payment structure before, and they advised me that they are good to use if you are unsure how long you plan to be self employed or are thinking of contracting for just a few months. But as I was quite certain that I wanted to go it alone for the foreseeable future, I felt the limited company option was probably a better solution for me.

After doing some number crunching, I decided that going down the umbrella scheme road was going to end up costing me more in the long run. The fewer tax liabilities combined with the umbrella company fee, over a long period of time, would not work out financially for my personal circumstances.

It was because of that, and the fact that I knew I wanted to be in full control of my business, that I decided setting up as a limited company was the right decision for me.  Another huge benefit I discovered, when looking into the world of owning my own business, was something called dividends. I had never come across this word before, but very quickly I learnt that that it is just another way of taking money from my business. Basically, after tax, you can pay yourself out of the profits of your company. The only thing you need to remember is you can’t take out more dividends than you make in profit because you would be in breach of the Companies Act 2006.

Choosing a company structure, Limited or Umbrella?Setting up as a limited company means you are the director – the big boss of everything – and you have complete control. I quite liked the thought of that, as working for myself was one of the main reasons I chose to become a contractor. But of course, being in charge does come with a level of responsibility. Naturally before fully understanding how easy it all was, the thought of dealing with the Inland Revenue and trying to work out my tax responsibilities made me break out in a cold sweat, but I realised that keeping on top of everything right from the start is the key. As long as you document everything you earn and spend, it really is not that difficult. At first I thought I’d spend ages on admin work each month, which again can seem quite daunting, but after getting the hang of it in the first few months (after a few calls to my accountant) I very quickly discovered a system that worked well for me. So now the time I spend on paperwork is kept to a minimum, leaving me more time to focus on the business and the family.

One of the main differences between a limited company and umbrella company is, as a limited company you are responsible for working out how much tax you owe the Inland Revenue and filling in your own Self Assessment form. For some, such as myself who was never very good at maths in school, this seemed a daunting prospect, but I discovered hiring a trustworthy and experienced accountant takes the stress out of worrying about numbers. My accountant can take on as much or as little as I want them to. They can assess my accounts, deal with the HMRC on my behalf, meet all tax deadlines and compile my tax and VAT returns accurately – well mine does anyway. Not only that, but your accountant will be able to advise you about what you are entitled to and by doing that, they automatically take the hassle out worrying about what you might owe the tax man.

Having done a lot of research into both payment structures, I would recommend to anyone thinking of setting up as a contractor, that they must decide what is best for them. You need to take into account how long you plan to operate as a self employed contractor for, what you want out of it and whether you think you could commit to the paperwork. Working for yourself – in whatever capacity – is hugely rewarding and gave me the flexibability that I had craved for. I no longer worry about my tax responsibilities and just focus on bringing in more clients and getting the job done as best as I can. My home and work life balance is just how I wanted it to be and I feel so much more in control of my life.

We hope you enjoyed this article.

For all other life stories, visit our Life as a Contractor Case Studies hub here, or click on the links below:

If you would like any further advice on contracting, please do not hesitate to contact our New Business Team on 01442 275789 or email

Also, why not read SJD's Limited company or Umbrella company guide - a comprehensive guide on the pro's and con's of contracting through either your own Limited company or an Umbrella company.