Moving from umbrella to contracting

Introduction

Are you thinking about moving from an umbrella company to contracting through your own company? When you do this, you will be work through your own limited company in the future.

When you are moving to a limited company status, this has many benefits. One of these is that you are more tax efficient in terms of better take-home pay.

You may have the opportunity to contract however it will only be for a short term. This could be 3 months or 6 months with no guarantee of future work. In this case, it will not be worth going contracting on your own. Therefore, you would be better choosing one of the contractor umbrellas that are available out there for short term work. Alternatively, if you can see yourself contracting for the long term, the switch to your own company will definitely be worthwhile.

Notably, when you are working through an umbrella and are looking to go contracting on your own, the process of moving to your own company is not so much different from when you move from being a permanent employment role into a contracting role.

Initial considerations

When you move into contracting and are working through your own limited company, there is also the IR35 legislation to take account of. 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 in place for the services to be provided for a fixed length of time. Therefore, when you are running your own limited company, if the contract is for end services with a large or medium business, the responsibility of determining the IR35 status falls with the service provider, rather than you as the contractor. Any company contractors that are caught by IR35 will be taxed like a normal employee. Therefore, it is key to be outside IR35 when you go contracting.

Once you have decided to go contracting on your own, there a few things that you will need to do. This includes setting up a limited company with Companies House. It would also be good to read some contractor guides to give you some valid background information.

The first steps to take   

The initial steps to take when you move from an umbrella company to contracting through your own company will include:

  • First, you will need to get in touch with your umbrella company. You will need to let them know your decision that you will be leaving on a certain date. In addition, you may need to give them a period of notice, although not all umbrella companies require this.
  • What’s more, it would also be a good idea to wait until the end of your current umbrella contract. Please note this is better than changing it to your own company partway through. Indeed, this is because the contract between your umbrella company and recruitment agency or end client may need rewriting. The new agreement would need to show the new arrangement between your new company and the recruitment agency or end client.
  • Your umbrella company will work out your final payment and this will include any expenses. The umbrella company will then make the final payment to you in due course.
  • As part of leaving the umbrella company, you will receive form P45. Ordinarily, you would pass this form on to your new employer. If you are starting up your own company, it 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 on to your accountant. This is because they will 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 of the switch   

Initial steps / thoughts

Some further steps to think about when you go contracting on your own will be:

  • Start the process of setting up your own company. You could do this by yourself, or you could appoint a contractor accountant. Your accountant will normally be happy to set this up for you.
  • Once your company is set up, you will then become the director, shareholder, and employee in your new business. Some people think that running your own company is the same as being self-employed but this is not correct. As a 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 your company is registered, you can set up a business bank account. There is lots of choice out there nowadays. In addition, most of the main banks enable a business to connect up with an online digital platform, such as FreeAgent. Digital platforms are now commonly used for business record keeping and FreeAgent is most suited for contractors and small business.

Secondary steps

Final thoughts

As a final note, the change from an umbrella company to being a company contractor running on your own is quite a simple process. In turn, if you also have a good contractor accountant, they can make this change easier for you.

Please have a read of our other article which covers when you contract through your own company versus umbrella company.

Link to Contractor Advice UK group on 

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: March 26th, 2021 / Categories: Moving Into Contracting /

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