Can an umbrella company pay a limited company?

Contractors love the freedom that comes with choosing which projects they want to work on.

Whether it’s juggling multiple assignments at the same time, or moving from one short-term arrangement to another, it can feel uplifting to shape a professional life in a way that fits your personal circumstances.

However, it pays to be informed about your tax and legal obligations which often includes weighing carefully whether to be employed by an umbrella company or to work for your own limited company.

If it’s the latter, then can an umbrella company pay a limited company? Let’s discuss below…

Can an umbrella company pay a limited company?

In short, yes, they can.

However, as outlined above, it’s important to be aware of the legal and financial implications of this type of transaction and how they impact your tax affairs and obligations as a contractor.

We’d recommend speaking to a specialist accountant for the best advice.

Contractors who choose to work through an umbrella company benefit from the convenience and ease, as well as access to accountancy advice and services.

As explained earlier, limited companies are a separate legal entity and directors cannot claim the money paid as their own like an employee does.

That makes the process more complex, and unnecessarily so.

Alternative considerations for whether umbrella companies can pay a limited company?

If a limited company carries out work directly for an umbrella company, then it will usually invoice the latter and so, yes, an umbrella company can pay a limited company.

However, the focus of this article is more on individual contractors providing services to end clients and which payroll solution is best.

The flexibility of contracting, as mentioned above, means that you can accept different types of arrangement.

It’s here it’s important to note that an umbrella company and a limited company are separate legal entities.

An umbrella company acts as an employer to contractors, handling their payroll, tax affairs, and holiday pay. Meanwhile, a limited company is managed by a company director and operates under its own legal structure.

Which is best depends in part on whether your contract is ‘inside IR35’ or not.

Read our article titled ‘Does IR35 apply when working for an umbrella company?’ to learn more.

Every contractor is unique, and the decision of whether to use an umbrella company or a limited company depends on an individual’s circumstances.

IR35 status is decided by end clients and each assignment is treated as a stand-alone arrangement. It makes sense to take advantage of the simplicity and employment benefits that come from being employed by an umbrella company for ‘inside IR35’ work.

Simultaneously, you may keep open the option of using your limited company for any outside IR35 contracts.

You could work through your limited company even if a contract is deemed to be ‘inside IR35’ but doing isn’t beneficial in tax terms.

Think about it; if you’re employed by an umbrella company and complete an ‘inside IR35’ assignment, you submit a time sheet once work is completed.

The umbrella company invoices the end client and, once payment is received, the umbrella company deducts taxes and National Insurance contributions (NICs) – along with taking its fee – before you’re paid.

If that money was sent to a limited company’s bank account, it would need to be entered as income and at the end of the financial year classified as part of that company’s turnover and net profit – which is then subject to corporation tax.

In short, you’d be worse off.

Much better, and less hassle too as it happens, would be for an umbrella company to make those deductions for you as an employee.

Contact Umbrella Tracker

To help you make the right decision when it comes to picking the most suitable payroll solution and umbrella company for your career, turn to Umbrella Tracker.

Our comprehensive umbrella company comparison service explores hundreds of fully vetted payroll providers on your behalf.

We take time to learn about your individual circumstances, using our extensive knowledge and pool of contacts in the contracting market place to make an informed recommendation from our Preferred Supplier Lists (PSLs).

Qhether you’re searching for the best umbrella companies for IT contractors, healthcare workers, or social workers, our team is on hand.

Have any questions about the difference between working for an umbrella company or a limited company, then please ask.

Why not contact us today by completing the form on our website?

Alternatively, give us a call on 0203 026 3303 and start a conversation with an experienced team member.