Are you taking the time to consider moving from umbrella company into contracting through your own limited company? Basically, there’s many benefits and advantages when you’re moving from umbrella into contracting. Indeed, when we consider this, the main benefit of moving from umbrella to limited status is the better take-home pay. However, when you take the step of moving from umbrella company to limited company there’s extra responsibilities as you’ll be a director of your own contractor limited company. Therefore, when you’re moving from umbrella to contracting, you’ll be a UK director in the future however you’ll also be in control of your own financial affairs.
Many UK professionals currently use umbrella companies for contractors (UK). However, if the option arose, they’d prefer to be a contractor with their own limited company. Nevertheless, this isn’t always an option, especially with the recent changes in IR35 legislation (see later on). Therefore, many contractors today will work through UK contract umbrellas. Although, given the chance to contract through their own limited company, many would take it.
If you’re currently working as an umbrella company UK contractor, you may be considering are umbrella companies worth it. As a result, you may be looking to make the switch. In this guide, we’ll look at the process of moving to your own limited company. When you’re contracting via umbrella company you may have the opportunity to work through your own ltd company. Therefore, we’ll look at the steps to take when you make the move from a contracting through umbrella company option to the initial process of setting up your own company for contracting in the UK.
Initial thoughts on moving from umbrella into contracting
What to think about first
When you’re moving from umbrella into contracting, you’ll work through your own limited company in future. As part of this, there’s the IR35 legislation to consider. This is now in place for both the public and private sectors, for large and medium businesses. The company and the client will have a contract for the services in place for a fixed length of time.
Therefore, when you run your own limited company if the contract is for end services with a large or medium business, the responsibility to determine the IR35 status falls with the service provider, rather than you as the contractor. Any company limited company contractors caught by IR35 will pay taxes like regular employees. Therefore, it’s key to be outside IR35 when you go UK contracting.
Other things to do
Once you decide to become a limited company contractor, there’s a few things that you’ll need to do. When moving from umbrella company into contracting, this includes when you set up a limited company with Companies House. What’s more, it’s also good to read some contractor limited company guides to give you some valid background information.
Moving from umbrella into contracting for yourself
The benefits of working through an umbrella company
As a professional in your own industry, are umbrella companies good to work through? Basically, if you work through an IT contractor umbrella company (if you work in IT) or another UK contractor umbrella company, there’s certain benefits of umbrella company contracting. Basically, these include contractor umbrella company sick pay and holiday pay, and your employer may also make pension contributions on your behalf. In addition, some further umbrella company benefits are that you will spend less time on administration and have fewer responsibilities.
The benefits of contracting through your own company
When you’re moving from umbrella into contracting, what’s the benefits and is contracting worth it (UK)? Basically, when you move from umbrella contracting to limited company status, this has many benefits. Certainly, one of the main benefits is that you may have the opportunity to earn more. What’s more, other advantages when you move from a contracting umbrella to working through your own limited company include:
- You’ll be more tax efficient in terms of better take-home pay.
- You’re in control of your own affairs.
- When you have your own company, this’ll look better in the eyes of certain recruiters.
- If you work efficiently, your own company can reimburse your salary, dividends, and expenses much quicker.
Considerations as part of the switch
In some cases, you may have the opportunity to moving from umbrella company to contracting; however, it’ll only be for a short term. This could be three or six months with no guarantee of future work. In this case, it’s not worth moving from umbrella to contracting on your own. Therefore, you’ll be better off taking the time to choose a contractor umbrella for short-term work. On the other hand, if you switch to being a limited company contractor, you can assess if it’ll be worthwhile contracting in the UK for the long term.
When you work through a contracting umbrella company and you look to go contracting on your own, moving to your own company isn’t so much different from when you move from a permanent employment role into a contracting position.
The first steps when moving from umbrella company to limited company status
The initial steps to take when you’re moving from umbrella into contracting through your own company will include:
- The first step when moving from umbrella to contracting is you’ll need to contact your umbrella company. When you do this, you’ll need to let them know your decision that you will be leaving on a specific date. What’s more, you may need to give them a period of notice, although not all contracting umbrella companies require this.
- When moving from umbrella to limited company status, it’d be a good idea to wait until the end of your current umbrella contract before you switch. Indeed, this is better than making the change to your own company mid-contract. What’s more, this is because the contract between your umbrella company and recruitment agency or end client may need rewriting. The new agreement will need to show the new arrangement between your new company and the recruitment agency or end client.
- When you’re moving from umbrella company to limited company contracting, please read another of our guides, which covers tax tips for UK contractors.
- Your contract umbrella company will work out your final payment, including any expenses. The umbrella company will make the final payment to you in due course.
Receive and send on form P45
As part of when moving from umbrella company to limited status, when you leave the umbrella company, they’ll give you form P45. Ordinarily, you will pass this form on to your new employer. If you’re planning to start up your own company, you can set up a PAYE scheme so that you can take a salary from it in future. When this is the case, you’ll usually send your P45 to your accountant. This is because they usually set up the PAYE scheme and process your salary in due course.
We also have a guide that compares the differences between UK contracting and freelancing and the key differences between these ways of working.
The further steps to take as part moving from umbrella into contracting
Some further steps to think about when you’re moving from umbrella to limited company status will be:
- Start the process of setting up your own company for contracting. You can do this by yourself or appoint a contractor accountant. Your accountant will generally be happy to set your company up for you.
- Once your company is set up, you’ll become the director, shareholder, and employee in your new business. Some people think that if you run your own company, it’s the same as being self-employed, but this is incorrect. As a UK contractor with your own company, you are, in a legal context, an employee of your new business. Indeed, you’ll also be a director and a shareholder too.
- When you’re moving from umbrella company into contracting, after you register your own company, you can set up a business bank account. What’s more, there’s lots of choices out there nowadays. In addition, most main banks enable a business to connect with an online digital platform, such as FreeAgent. Digital platforms are now used across the board for business record keeping. Key to note, FreeAgent is most suited for UK contractors and small businesses and many UK business owners favour this.
Secondary steps when moving from umbrella into contracting
Some further things for you to do as part of the moving from umbrella company into contracting process are:
- From the outset, once you register your company, it’ll be good to have a Business Tax account with HMRC. Once this is set up, it’ll give you a good overview of when your company is paying taxes in the future. Once your company is set up, HMRC will automatically register it for Corporation Tax. If you need to file VAT returns in the future, you can set up an HMRC Business Tax account and register the business for VAT. In due course, the Corporation Tax service and PAYE for employer service can also be added to the Business Tax account. Once you do this, you can view the position of your company’s taxes via your Business Tax account.
- As part of your set-up, the best step is to appoint a specialist contractor accountant to look after you and help with your tax planning. Furthermore, your accountant will help ensure you are set up going forward. They should also help you operate in a tax-efficient manner. In addition, they’ll advise you where you can receive tax relief in all the different areas when you run your own company. You can bring the accountant in once you register your company. On the other hand, you can ask them to take care of the company registration process.
As a final note, when you’re moving from umbrella into contracting, there’s some factors to consider. When you change from an umbrella for contractors to becoming a contractor who runs your own UK company, this is quite a simple process. What’s more, when you’re moving from umbrella to limited company status, if you have a good contractor accountant, they can make this change easier for you.
Finally, what are the benefits of an umbrella company compared to the benefits of contracting through your own UK company? Please read our guide, which covers when you contract through your own company versus an umbrella company in the UK. We also show the advantages and disadvantages of both business structures.
Link to Contractor Advice UK group on