Umbrella Companies - time to switch to a limited company?

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Why switch to a limited company?

If you are operating in an umbrella but are intending to contract in the long term then it will probably be worth switching to a limited company instead. The main reason for this is tax efficiency. After all, you have taken the entrepreneurial risk of becoming self employed - so why should you not take advantage of the tax benefits? If you operated in a limited company, it would pay you a modest salary and pay the remainder of its profits to you as a dividend. This would reduce your tax liability considerably as much less tax is paid on dividends than salaries. Additionally and you and your company would not pay any employer's and/or employee's NIC's on your dividends. As a self employed person, you would be taxed as such by using a limited company. The financial benefits can be significant.

How to switch:

The process of switching from an umbrella company to a limited company is quite easy and probably much easier than you might imagine.

Firstly:

You will need to check to see if your umbrella provider stipulates a minimum operating period or a notice period. Obviously you will not be able to leave your umbrella without providing this notice or serving the minimum period.

Secondly:

You would need to arrange for your current contract to be transferred from your umbrella to your limited company. To achieve this you will probably need the help of both your umbrella provider and your agency. If it is not possible for you to transfer your contract, the best thing for you to do will be to wait for your current contract to expire and then to set the new contract up with your limited company rather than your umbrella provider.

Thirdly:

On leaving the umbrella, you just need to make sure you are paid the correct amount for the work you have done that is outstanding and for any holiday pay and/or expenses. As the umbrella company will still exist and still go on serving other contractors after you leave, it will not be shut down or stuck off or dissolved so you should not incur any fees for this.

Finally:

You can get your limited company set up and enter into all future contracts via this company. In reality we would suggest that you set up your limited company in preparation for step 2 above so that it is ready and waiting when your old contract expires. Probably the easiest way to do this will be to use an online limited company where you can do everything over the internet. Some of them even include contract reviews and IR35 insurance insuring you against the professional costs of defending an IR35 investigation and (in some cases) even indemnifying you against any outstanding tax, interest and fines if you lose!

IMPORTANT

Please read our section on the MSC Rules to ensure your understanding of umbrellas is complete and accurate.

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Full index of pages:

Home Page IR35 Background - page 1 IR35 Background - page 2 IR35 Background - page 3

IR35 Rules - page 1 IR35 Rules - page 2 Beat IR35 - page 1 Beat IR35 - page 2

Beat IR35 - page 3 Beat IR35 - page 4 Ltd Company - page 1 Ltd Company - page 2

Ltd Company - page 3 Ltd Company - page 4 Umbrella Companies - page 1

Umbrella Companies - page 2 Composite Companies - page 1 Composite Companies - page 2

Composite Co - page 3 Composite Co - page 4 MSC - page 1 MSC - page 2 IR35 Insurance

IR35 Investigations - page 1 IR35 Investigations - page 2 Contracts - page 1

Contracts - page 2 Contracts - page 3 Resources 1 Resources 2 Resources 2 Sitemap