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  • Writer's pictureUmbrella Search

How to make the move from limited company to umbrella

In this comprehensive guide, we delve into the nuances of moving from from operating as a limited company to working under an umbrella company, a decision some contractors may be contemplating at some stage of their career. This guide, brought to you by Umbrella Search, aims to shed light on the reasons for such a move, and provides insights into choosing the right umbrella company for your contracting needs.

First of all, it's important to understand the distinctions between an "umbrella company" and a "limited company" in a context of choosing the best business structure for your needs. 

Here's a concise definition of each within the framework of contracting.

What is an Umbrella Company?

An umbrella company acts as an intermediary between contractors and their clients.

When working under an umbrella company, the contractor becomes an employee of the umbrella company. The umbrella company is responsible for invoicing the client for work done, collecting payments, and then paying the contractor a salary, after deducting taxes and National Insurance contributions directly through PAYE (Pay As You Earn).

This arrangement simplifies the administrative and financial responsibilities of the contractor, as the umbrella company handles tax calculations, invoicing, and ensures compliance with employment laws. Contractors under umbrella companies also benefit from employment rights such as sick pay and holiday pay.

What is a Limited Company?

A limited company is a business structure where the company is a separate legal entity from its owners.

Contractors operating through a limited company (often as the sole director and shareholder) have full control over the company's finances and decision-making processes. This structure allows for tax efficiency, as income can be drawn in the form of a small salary and dividends, potentially reducing the overall tax liability compared to a traditional employment model.

However, running a limited company involves more complex accounting and administrative responsibilities, including invoicing, tax filings, and dealing with corporate regulation. Contractors using a limited company structure must also navigate the IR35 legislation, which can affect their tax status and liabilities.

Each structure has its advantages and disadvantages, influenced by factors such as administrative burden, tax efficiency, personal liability, and compliance with IR35 legislation. The choice between an umbrella company and a limited company depends on the individual contractor's preferences, working circumstances, and financial goals.

What is an umbrella company?

Why move from a Limited Company?

Contractors might be considering a shift away from a limited company structure to an umbrella company arrangement for a number of reasons:

  • IR35 Legislation Changes: The amendments to IR35 legislation, effective from April 2021, have heightened the tax liabilities for many limited company contractors, aligning them more closely with traditional employees but without the associated benefits. The complexity and risk of IR35 investigations are driving contractors towards umbrella companies, where IR35 concerns become irrelevant.

  • Invoicing Hassles: Managing invoices and chasing late payments can be a significant burden for limited company contractors. Umbrella companies alleviate this stress by handling invoicing and payment collection, allowing contractors to focus on their work.

  • Complex Tax Calculations: The responsibility of setting aside funds for taxes and National Insurance, along with the intricate process of filing self-assessments, can be daunting. Umbrella companies simplify this by managing tax calculations and deductions directly through payroll.

  • Reduced Administration: The administrative load of managing invoices, tax returns, and communication with regulatory bodies is significantly reduced when partnering with an umbrella company, which takes on these responsibilities.

  • Financial Stability during Leave: Limited company contractors must budget for holidays and sick leave independently, a challenge that umbrella companies address by offering statutory benefits to their employees.

Making a move to an Umbrella Company

If you have decided that contracting under a limited company is not something that is suitable for you and wish to move to operate under an umbrella company, the first step is to either close your limited company or make it dormant. This involves notifying Companies House and HMRC of your intention to dissolve the company or cease its trading activities. 

Opting for a Members' Voluntary Liquidation (MVL) might be beneficial for solvent companies with over £25,000 in funds, allowing for tax-efficient closure.

Selecting the Right Umbrella Company

The abundance of umbrella companies presents a variety of options, but also the challenge of making an informed choice. This is where Umbrella Search comes in. Utilising our range of umbrella companies, contractors can communicate their specific requirements and swiftly receive a quotation tailored to their needs. This list highlights the services, benefits, fees, and potential take-home pay associated with each option, enabling an informed decision-making process.

A few other things to consider when choosing an umbrella company:

Embark on Your New Journey

Ready to explore your options? Understanding the value of having an umbrella company handle your contractor insurance is the first step. If you're considering the switch to an umbrella company that meets all your needs, we're here to guide you through the process.

Umbrella Search is dedicated to helping every contractor find their ideal umbrella company match. By understanding your specific requirements and preferences, we streamline the search process, eliminating the need for extensive research on your part. We'll provide you with a curated list of top umbrella companies that align with what you're looking for. Simply reach out to our team, and we'll handle the details, making the journey to finding your perfect umbrella company effortless. Are you ready to partner with your ideal umbrella company?

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