Limited company vs umbrella calculator

Apr 23, 2023

Written by Greg Hanton. Greg is co-founder of Joy Pilot, No Worries Accounting, No Worries Red Umbrella, and Capital City Accountancy. He has over two decades of experience in providing tax and accounting support to contractors, especially those working in the UK. Greg holds a BE (Hons) in Chemical & Process Engineering from the University of Canterbury and a BSc in Chemistry from the University of Otago. He is also a Chartered Accountant (ACCA), member of AAT, and a Chartered Engineer (IChemE). With a passion for innovation and client-focused solutions, Greg continues to lead the charge in transforming the accounting landscape. See more on LinkedIn.

Updated on: May 21, 2024

We have several accounting clients who will often take a contract that requires them to use a PAYE umbrella. Because we also run our own Umbrella service (called No Worries Red Umbrella) we are in an ideal position to provide some insight based on real feedback from clients about how the take home pay of a limited company contractor will change if they need to use an umbrella service for their next contract.

The difference between the two models of contracting could easily add up to the value of a relaxing break in the US enjoying a hot stone bath at Mammoth Lakes in Cali.

But before we look at a limited company vs umbrella calculator illustration, let’s quickly cover off these two forms of contracting entities.

Your own limited company

Our accounting clients all have their own limited company, and typically they are the sole director and sole shareholder of the business. Of course, this is not always the case, the most common exception being where the contractors partner is also included in the business as a shareholder. But for now let’s just consider a single person limited company.

Typically, what happens is the contractor sets up their own company, company bank account, and gets the company registered for corporation tax, PAYE, and often VAT as well. When they perform work for their end client they submit an invoice with the agreed hourly or daily rate, which gets paid into their business bank account.

Then through a mixture of salary and dividend payments, they extract that income from their business as take home pay, and throughout this process the limited company will accrue a corporation tax liability, a VAT liability, and sometimes a PAYE/NIC liability through the company payroll.

Our job as accountants is to ensure all taxes are correctly accounted for, that the contractor is extracting funds from their business and the most tax efficient way, and that the company keeps its statutory filings up-to-date.

Using an umbrella company

An umbrella company is a much simpler way of contracting, but that simplicity comes with a reduction in flexibility and potential for tax savings. Essentially the umbrella company acts as the employer, and the contractor becomes an employee of the umbrella company (from here let’s call that person an umbrella worker). For each week of work, the Umbrella worker submits a timesheet to the Umbrella firm (and often to the agency/end client they work for as well). The umbrella company then creates an invoice to the agency/end client based on the hourly/daily contract rate that was agreed.

Once the invoice has been paid, the umbrella company makes payroll related deductions from that timesheet income, they also take a small margin (fee) to cover their own costs, and the remaining net pay is paid directly into the Umbrella workers personal bank account.

That’s it. Nice and simple and no further reporting or tax filing obligations on the umbrella worker.

Our scenarios

Let’s look at two scenarios where we have two contractors who are neighbours and who work for the same end client but doing different roles. Kellie is a chartered engineer who works for an offshore oil and gas firm and is paid £500 per day. Her neighbour Shane is a newly qualified graphic designer who helps the same firm produce brochures and reports, and is paid £180 per day. We have another scenario also that compares limited company, sole trader, and Umbrella.

Let’s assume that for the purposes of claiming home to work travel, that this is a temporary workplace, and that while the contract will only run for six months that they expect to have more work become available across the year. Weekly travel costs are £80. They also both have mobile phones which cost them £34.66 per month, and neither of them contribute to a pension.

Limited company calculation

Working through a limited company, Kellie’s effective net take home pay will be £1,648.15 per week. The total maximum amount paid to Kellie will be £2,051.40, but we recommend Kellie leaves £403.25 of this in a personal savings account because this is her estimated weekly personal tax bill based on weekly income of £2,051.40. She will need this to pay her personal tax bill after the end of the tax year.

Working through a limited company, Shane’s effective net take home pay will be £721.52 per week. The total maximum amount paid to Shane will be £755.40, but we recommend Shane leaves £33.88 of this in a personal savings account because this is his estimated weekly personal tax bill based on weekly income of £755.40.

To run this calculation we have used weekly ltd company expenses of (a) travel costs of £80, (c) mobile phone costs of £8, and have assumed they are using our Club Gold accounting service which costs £105 + VAT per month. This is a very basic calculation and there is more scope for other expense deductions and tax planning.

Use our Limited Company Take Home Pay Calculator to run further illustrations of how your contract rate and expenses can affect your net take home pay.

Umbrella pay calculation

Working through an Umbrella company, Kellie’s net take home pay will be £1,445.18. Also, to make a fair comparison, her travel costs and mobile phone costs must also be deducted from this, making her overall net pay 1,445.18 – 80 – 8 = £1,357.18.

Working through an Umbrella company, Shane’s net take home pay will be £615.35. Also, to make a fair comparison, his travel costs and mobile phone costs must also be deducted from this, making his overall net pay 615.35 – 80 – 8 = £527.35.

There are no additional variables used in this calculation, and I have simply assumed that both employees are on the usual 1257L tax code with no student loan deductions and no pension contributions. Our umbrella calculator includes these factors so you can see for yourself how they might impact your net take home pay.

An umbrella calculator looks at your timesheet income and calculates your net take home pay calculator in two steps. The first involved deducting employer related costs such as the Umbrella margin, apprenticeship levy, and employers national insurance contributions. The second part of the calculation takes the remaining funds (called your Gross Pay) and deducts employee related tax liabilities such as PAYE and employee national insurance. This calculation is common across all major umbrella companies.

Use our Umbrella Take Home Pay Calculator to run further illustrations of how your contract rate can affect your net take home pay.

Overall Summary

You can see from the above take home pay calculation that there are significant advantages for both contractors to work through their own limited company. Both calculations factor in the workers tax free allowance and base the payroll calculations on the same tax code, but the improvement in net pay through a limited company means that those agencies and end clients who are prepared to structure their contract assignments to ensure they are not inside IR35 will get the best candidates due to the tax advantages.

In the above illustration if Kellie was required to complete the same role as an umbrella worker her net weekly take home pay would drop by £290.97 (17%), and for Shane his net weekly take home pay would drop by £194.17 (27%).

That is not to say working through your own limited company is full of tax loopholes, but rather contractors who are required to work through a PAYE umbrella get very little financial incentive to compensate for the lack of job security, and loss of perks and benefits that full time employees enjoy.

We see this each day with our accounting clients where they are required to work through a PAYE umbrella that offers no more job security, perks, or benefits, than if they were working through their own limited company. We look forward to the day when the issues surrounding IR35 and temporary workers are resolved so that the UK can once more draw on a pool of talented, flexible, high performing workers to help kick start major projects and boost productivity.

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