When contracting a key decision is whether to operate through a limited company or an umbrella
arrangement. In a nutshell, a simple summary of the advantages and disadvantages of each is as
• Advantages of a limited company: most tax-efficient solution, likely to maximise take home
pay and worthwhile if you will be contracting for 3 to 6 months or more, or on an on-going a
basis. You can optimise your remuneration with a mix of dividends and salary, with no National
Insurance to pay on dividends, claiming a wide range of incurred expenses against your income
and benefiting from the flat rate VAT scheme (where your customers can predominantly
recover their VAT). This arrangement also legally separates you from the business, providing
some protection from personal liability. It can also give a more professional impression in some
situations. You are in control of your own money and free to run things your way.
• Disadvantages of a limited company: there are extra administrative responsibilities, you will
probably need to invoice your customers/agencies and incur the cost of an accountant. You
will also have certain obligations as a company director. However, accountancy fees are
usually more than offset by the tax/national insurance saved and with a specialist contractor
accountant, using a tailored web-based portal, everything can be taken care of easily and
quickly, with minimum hassle and fuss.
• Advantages of an umbrella company: this is a simple arrangement, with little for you to do other
than sign up, with all client invoicing, cash collection and remuneration being handled via the
PAYE system by the umbrella company and less for you to do. Particularly suitable if you are only
contracting once, for a short time, or between permanent jobs.
• Umbrella company disadvantages: you are likely to realise less take home pay and the higher the
earnings, the greater the reduction in take home percentage (unless the company is using a non-PAYE tax scheme which could lead to later issues with the revenue). You are also less in control
of your own affairs, with the umbrella company responsible for invoicing and collecting cash
from your agency or client.