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Introduction -moving from umbrella into contracting
Are you taking the time to consider moving from umbrella company into contracting through your own UK limited company? There are many benefits to doing this the main one of which will be better take-home pay. When you take the step to moving from umbrella to contracting, you will work through your own UK contractor company in the future and be in control of your own financial affairs.
When you are moving from umbrella into contracting you will work through your own limited company in future. As part of this, there is 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 to be provided 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 is key to be outside IR35 when you go contracting.
Once you decide to become a limited company contractor, there are a few things that you will need to do. This includes when you set up a limited company with Companies House. It would also be good to read some contractor limited company guides to give you some valid background information.
Moving from umbrella into contracting -the benefits of an umbrella company
If you work through an umbrella company, there are benefits such as holiday pay and sick pay, and your employer may also make pension contributions on your behalf. In addition, you will also spend less time on administration and have fewer responsibilities. However, when you move to limited company status, this has many benefits. Notably, one of the main benefits is that you may have the opportunity to earn more. Furthermore, other advantages include:
- You will be more tax efficient in terms of better take-home pay.
- You are in control of your own affairs.
- When you have your own company, this will 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 will only be for a short term. This could be three or six months with no guarantee of future work. In this case, it is not worth moving from umbrella to contracting on your own. Therefore, you will be better off taking the time to choose one of the contractor umbrellas available for short-term work. Alternatively, if you switch to being a limited company contractor, you can assess if it will be worthwhile contracting for the long term.
Notably, when you work through an umbrella and you look to go contracting on your own, moving to your own company is not 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 are moving from umbrella into contracting through your own company will include:
- The first step when moving from umbrella to contracting is you will need to contact your umbrella company. You will need to let them know your decision that you will leave on a specific date. In addition, you may need to give them a period of notice, although not all umbrella companies require this.
- When moving from umbrella to limited company status, it would be a good idea to wait until the end of your current umbrella contract before you switch. Please note this is better than making the change to your own company mid-contract. Indeed, 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.
- Please read our article, which covers tax tips for UK contractors.
- Your 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 will give you form P45. Ordinarily, you will pass this form on to your new employer. If you are 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 will 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 contracting and freelancing and the key differences.
The further steps to take as part moving from umbrella into contracting
Some further steps to think about when you are moving from umbrella to limited company status will be:
- Start the process to set up your own company. You can do this by yourself or appoint a contractor accountant. Your accountant will generally be happy to set this up for you.
- Once your company is set up, you will become the director, shareholder, and employee in your new business. Some people think that if you run your own company it is 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 will also be a director and a shareholder too.
- Once you register your own company, you can set up a business bank account. Please note, there are 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, and FreeAgent is most suited for UK contractors and small businesses.
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 will be good to have a Business Tax account with HMRC. Once this is set up, it will 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.
- You can make a list of your pre-trading expenditure. Our guide on business expenses also gives an overview of what you may be able to claim going forward.
- As part of your set-up, you can appoint an 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 will 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. Alternatively, you can ask them to take care of the company registration process.
As a final note, when you are moving from umbrella into contracting, there are some factors to consider. When you change from an umbrella company to becoming a company contractor who runs on your own this is quite a simple process. In addition, if you have a good contractor accountant, they can make this change easier for you.
Please read our other article, which covers when you contract through your own company versus an umbrella company.
Link to Contractor Advice UK group on
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