What is the best option for you?

Contractors and freelancers in the UK commonly face two options to operate: being a director of a limited company (Personal Service Company) or becoming an employee of an umbrella company. In this guide, we explain both options and the advantages and disadvantages of each. One of the main deciding factors that may influence your decision is IR35. If you are working on assignments inside IR35, an umbrella is likely to be your best option. Alternatively, if you are working outside IR35, you have the option of working as a limited company director.

Contracting with a PAYE umbrella company

Tens of thousands of UK-based contractors and freelancers use umbrella companies for their payroll. There are plenty of advantages and disadvantages that you should consider, and we’ve summarised these below.

Advantages of using an umbrella company as a contractor

  • Compliance – Using an umbrella company helps you comply with UK tax rules. Compliant umbrella companies will process your payroll via PAYE – HMRC’s tax system. This ensures that the correct deductions are made to your salary and sent to HMRC (just like an employee). Churchill Knight Umbrella is FCSA-accredited and SafeRec certified and we’re proud to have these accreditations to showcase our dedication to providing the best payroll service to the UK’s temporary workforce.
  • No tie-in period – Umbrella companies are there for you to use when needed. You will not be required to pay any joining or leaving fees, and the umbrella company’s margin (the small amount they deduct from your assignment rate) only applies when the umbrella pays you. Therefore, you can remain on the books of an umbrella company between contracts without any fees applying.
  • Administration – When registering with an umbrella company, you must provide them with personal information, including name, address, date of birth, NI number, assignment details and bank information. You will also need to provide proof of your right to work (RTW) in the UK and sign and return a contract of employment. Once you have done this, the ongoing administration is minimal. To be paid on time, you will need to submit a signed timesheet unless your agency is self-billing, but overall, the administrative burdens of using an umbrella company for your payroll are minimal, especially compared to being the director of a limited company.
  • You can use the same umbrella company for your temporary assignments – If you continually work on inside IR35 assignments, you can use the same umbrella company for all of your assignments – saving you the hassle of having to register with multiple umbrella companies in a short space of time.
  • Continuity of employment – Following on from the point above, using the same umbrella company allows you to benefit from continuity of employment. Not only does this reduce potential admin that occurs when you transfer between umbrella companies, but it can help you financially. Continuity of employment means you have the same employer (the umbrella company), helping contracts to source external finance from mortgage lenders and banks.
  • Employee benefits – As an employee of an umbrella company, you will have access to Employee Benefits, including Sick Pay and Maternity/Paternity Pay.
  • Low cost – Assuming you use a trustworthy umbrella company, you will almost certainly benefit from an excellent value service. Umbrella margins usually apply weekly and vary between £15 – £30, significantly less than hiring a contractor accountant to support you with the administrative responsibilities of running a limited company.
  • Plenty of choice – There are over 500 umbrella companies in the UK. With so much choice, you should never put up with a substandard service. It’s important to remember that you are responsible for your tax affairs. Therefore, it’s essential you pick a compliant umbrella company and its recommended you pick one that is FCSA-accredited. If you ever suspect your umbrella company is not paying you compliantly, leave them immediately and report them to HMRC.
  • SafeRec – SafeRec is transforming compliance and transparency in the umbrella company marketplace. Powered by AI, SafeRec certified umbrella companies will issue you with a payslip audit every time you are paid – allowing you to see whether you’ve been paid correctly and all the deductions are legal and accurate. Before SafeRec, this level of transparency had never been achieved.

Disadvantages of using an umbrella company as a contractor

  • Lack of control over finances – Being the director of a limited company gives you greater control over your business finances. However, the opposite can be said when using an umbrella company because you’ll be paid your net salary directly into your personal bank account, with all deductions made to HMRC on your behalf (by the umbrella company). For some, this will be an advantage, for others, it’s a major disadvantage.
  • PAYE – There is no hiding from it: the most tax-efficient way to operate as a contractor or freelancer is through a limited company working on outside IR35 assignments. This is because you can pay yourself with salary and dividends. However, while PAYE may not be as appealing, you will know you are paying the correct tax, which should give you some peace of mind.
  • Potential payment delays due to supply chain – For you to be paid on time, your end client needs to send funds to your agency, and then your agency needs to send your assignment rate to the umbrella company. The umbrella will then process your payroll, make the correct deductions and send your net salary to your bank. However, if your client is late sending your funds down the chain, you could be paid late, and it might not be the fault of your umbrella.
  • Tax avoidance schemes – Unfortunately, while most umbrellas provide a compliant service, there are a handful of tax avoidance schemes out there targeting contractors and freelancers. It’s essential you conduct thorough due diligence and use a compliant umbrella, because using a non-compliant provider (even by mistake) could land you a serious fine or penalty from HMRC.
  • Statutory benefits are not as good as the benefits permanent employees may have access to – Statutory employee benefits are certainly a positive reason to use an umbrella for your payroll. However, some employers will offer permanent employees better benefits and more than just the statutory employee benefit’s you can access.
  • Changing umbrella companies is a hassle – It’s true, changing umbrella companies is a little tedious. Firstly, you need to let your current umbrella know your desire to leave so they can issue you a P45. You then need to identify a new umbrella company and go through the registration process, which can sometimes take upwards of 15 minutes. However, you should never put up with substandard service, and if you think your current umbrella is non-compliant with UK tax law, you should move immediately.

Benefits of registering with Churchill Knight Umbrella

Since launching in 2017, we have quickly become one of the most popular umbrella companies in the UK and offer a compliant and reliable payroll service to contractors and freelancers in the UK.

Churchill Knight Umbrella is committed to compliance and is proud to be an FCSA-accredited umbrella company. Having passed the strict auditing and assessment process, we’ve proven that we operate ethically and in accordance with UK tax law and HMRC regulations.

As well as being accredited by the FCSA, Churchill Knight Umbrella is a SafeRec certified umbrella company. This means that all of our employees receive a payslip audit every time we process their payroll – allowing them to check they have been paid correctly, compliantly and that no unethical or hidden deductions have occurred. SafeRec certification puts compliance in the power of contractors and freelancers, and it means non-compliant umbrella companies have nowhere to hide.

When you register with Churchill Knight Umbrella, you can benefit from:

  • Simple and straightforward registration process
  • Ongoing support from our Onboarding and Umbrella Customer Service Team
  • Access to My Digital our umbrella portal and app
  • Same Day Faster Payments
  • £25 million insurance cover
  • No tie-in period and no hidden costs
  • Employee benefits such as Sick Pay and Maternity/Paternity Pay
  • Salary sacrifice service
  • Churchill Knight Rewards

If you are interested in a free, tailored take-home pay calculation from an FCSA accredited and SafeRec certified umbrella company, please call us on 01707 871622 or request a callback.

Becoming the director of a limited company (Personal Service Company)

For decades, operating with a limited company has been a popular choice for UK-based contractors and freelancers who are deemed outside IR35. Setting up a limited company creates a separate structure for your business and gives business directors limited liability, meaning personal finances are not a risk – only the money put into the business by the director. There are plenty of advantages and disadvantages of contracting with a limited company, and we explore these below.

Advantages of a limited company

  • Limited liability – Operating with a limited company gives you, the business owner, limited liability. This will protect your personal assets should your business struggle. Limited liability is commonly considered the biggest advantage of running a limited company.
  • Tax efficient – Limited company directors can pay themselves with a combination of salary and dividends, and this is more tax-efficient than PAYE – HMRC’s system for employees. There are also many more opportunities for tax planning compared to working via an umbrella company.
  • You can set up a business in 24 hours – Setting up a limited company is a straightforward process, and you can do it yourself in minutes or use the services of a professional accountant to assist you.
  • Business expenses – Trading through a limited company will allow you to benefit from claiming business-related expenses such as accountancy fees, professional subscriptions, fees that occur as part of business travel, and more.
  • Shares – You can create share classes which are helpful when it comes to tax planning and if you are interested in attracting investors or dividing the ownership of your company.
    Selling the company or passing it on is easy – Because your limited company is a separate entity, if you choose to sell it or pass it on to someone else, it’s an easy process.

Disadvantages of contracting with a limited company

  • IR35 – Since the introduction of IR35 (2000) and changes to off-payroll working in the public sector (2017) and private sector (2021), there appear to be fewer outside IR35 temporary assignments. As a result, more and more temporary workers are required to use PAYE umbrella companies for their payroll – eliminating the advantages of being a limited company director. There is a lot of additional legislation that limited company directors must adhere to.
  • Plenty of administration – While setting up a limited company is easy (via Companies House), limited company directors have a lot of important responsibilities to remain compliant with UK tax laws. Every year, you must file Annual Accounts with HMRC and Companies House and complete a confirmation statement.
  • Contractor accountants can be expensive – Hiring a contractor accountant is popular amongst contractors and freelancers with a limited company because there are many administrative responsibilities. However, contractor accountants can be pricey. It’s well worth shopping around and comparing accountancy services among the most popular accountants in the UK.
  • Not ideal for short-term contractors and freelancers – Setting up a limited company is a big responsibility. If you are new to contracting or freelancing, you will probably want to try it without going through the processes involved in setting up a limited company.
  • Branding – Setting up a limited company may inspire you to create a business logo and professionally designed paperwork (such as a letterhead, invoice, quotation templates, etc.). However, doing so can be very time-consuming, and outsourcing may be expensive. The same applies to whether you decide to have a company website and professional emails.
  • Public domain – All your company accounts and information is available in the public domain. While some people do not mind this, some prefer privacy.

Appoint a contractor accountant

As a limited company director, you are responsible for ensuring all company records are accurate and up-to-date, and you must ensure all accounts and tax returns are filed correctly and on time. Many contractors who through their own limited company will choose to appoint a dedicated contractor accountant to look after their accounts and offer proactive tax planning and advice tailored to your business and goals.

Our sister company, Churchill Knight & Associates Ltd, has been an industry-leading provider of contractor accountancy. Their FCSA-accredited accountancy service is designed to make your life as easy as possible and is suitable for contractors in any industry at any stage of their career.

Please visit their website to learn more about Churchill Knight & Associates Ltd’s accountancy service.

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