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Self-Employed vs Limited Company

Umbrella companies vs. PAYE


On the face of it, there might seem like little obvious difference between working under an umbrella company and paying PAYE (Pay As You Earn) income tax via an agency payroll.

But the repercussions for your financial circumstances can be significant, so it's worth taking the time to learn a little more about the differences between umbrella companies and PAYE.

For example, you could be missing out on tax-deductible pension contributions, the ability to claim back your business expenses, and the advantages of being in continuous employment on paper.

When you work as a self-employed individual, there is often an expectation that you will eventually set up your own limited company - but why is this? If you work as a sole trader or lone contractor, is it worth setting up a limited company at all?

In this guide we will look at working self-employed vs limited company benefits, who can earn more via each option, and some of the Primis umbrella company solutions that can help to simplify your finances, accounting and tax admin.

Working as a Self-Employed Individual

When you work as a self-employed individual, you earn your income by contracting directly with a business. Your earnings are not distinct from your personal finances and your name is not a matter of public record (whereas company directors are listed at Companies House and online).

Self-Employed Tax

Self-employed individuals pay tax via self-assessment, instead of via PAYE (pay as you earn) deductions.

This means that you have to file accounts, find out how much you owe HMRC and pay this in full by January 31st of the following year.

If you're required to pay 'on account' you must also make biannual tax payments upfront on (or before) January 31st and July 31st, with a balancing payment the following January 31st.

Self-Employed Liability

Working as an individual, there is no limited company in place to absorb the liability if something goes wrong.

That means you can be held personally responsible - and financially liable - if your business fails or is judged to be non-compliant.

You can protect against this to a certain extent with insurance policies like professional indemnity and public liability, but you will always have that direct connection between your personal life and your business liabilities.

Umbrella Company Benefits for Self-Employed Contractors

There are numerous benefits from an umbrella company for self-employed individuals. Our PAYE payroll solution is suitable for individuals who fall inside IR35 regulations.

You get full compliance with employment legislation, easy implementation of all relevant taxes, and £25 million of all risk insurance cover as standard.

In addition, you'll get the kinds of benefits that are normally only available to permanent employees, including holiday entitlement and pension contributions, with access to our Online Portal to manage your business affairs and profile.

Working as a Limited Company

Setting up a limited company gives you a separate legal entity for your business activities. You must register with Companies House and appoint a company director, whose name is a matter of public record and searchable online.

Paying Tax as a Limited Company

Limited companies are required to file company accounts and a tax return. There's more admin work involved with doing this, and the reporting requirements and legal implications are more complex.

However, because you pay corporation tax rather than personal income tax, this is a more tax-efficient structure, especially for people who earn more than about £20,000 in profits.

Limited Company Liability

A limited company structure means that if the business fails, the financial liability stops with the company - your personal finances are (generally speaking) not at risk.

The trade-off is that if you decide to move on from your company, you'll need to apply to Companies House to have it wound up, which can take longer than just changing your career path as an individual.

Benefits of Umbrella Companies for Limited Companies

Having a limited company doesn't stop you from working under an umbrella company, and there are some useful benefits to combining the two.

Primis offer several payroll solutions for limited companies:

  • Deemed Tax: Suitable if you work on multiple assignments and want to be paid via a limited company. We make statutory deductions on your behalf and pay your net profits into your limited company with full compliance.

  • Personal Service Company: A PSC lets you run your business on your own terms. Choose weekly or monthly invoicing and fee payments with intermediary reporting and full online access for more efficient tax planning.

You can compare umbrella services for limited companies by downloading our Key Information Documents (KIDs) or just ask if you would like to know more about which limited company payroll solution might be right for you.

Comparing Self-Employed vs Limited Company

Remember, a limited company separates your business interests from your personal finances and legal liability; however, self-employed is the easiest status to manage.

In both cases, you must file a tax return, either via self-assessment for individuals, or as part of your company accounts if you have a limited company.

If you're concerned about your privacy or you want to be able to move on more easily to a new job or career, self-employment keeps your name out of the public records and doesn't need you to wind up or liquidate a company if you decide to quit.

But if you earn more than about £20,000 per year in profits, it's very likely that a limited company will be more tax-efficient, giving you higher take-home incomes when you pay corporation tax rather than self-assessed income tax.

Reducing Self-Employed Admin

Both self-employed status and limited company status require you to file accounts. It's likely that in the coming years, the Making Tax Digital initiative will mean you have to file accounts online on a quarterly basis, replacing the current annual self-assessment deadline.

If, like many people, you prefer to spend as little time as possible on business admin like updating your accounts - and if you have been caught out in the past by an unexpectedly high tax bill with no time left to pay before January 31st - then a PAYE umbrella company could be the solution for you.

This offloads the vast majority of the accounts admin onto the umbrella company and ensures you pay the right amount of PAYE tax as you go along, so there's no balancing payment to cover right after the expense of Christmas and New Year. 

Contact Primis

If you're still not sure whether self-employed status or a limited company is best for you, contact Primis and we'll be happy to help you decide, as well as choosing an umbrella solution that takes the admin burden off of your shoulders.

Just fill in the form on our Contact Us page for a prompt response, or you can call us on 01925 912200 or email and we'll do our best to answer any questions you might have for us.

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