Many contractors will be considering making the move from a limited company to umbrella company, but might not be clear of the best way forward.

To help, in this guide Umbrella Broker explains how to move from limited to umbrella in 2021, looking at why you might change your contracting arrangements and what to look out for when taking the leap.

Why make the move away from limited company?

There are many reasons that contractors might be considering making the move away from a limited company to an umbrella company.

Some of these reasons include:

Avoid IR35

Many limited company contractors will be considering moving to an umbrella company in light of recent reforms to IR35 legislation.

These reforms, which came into effect from April 2021, mean that thousands more limited company contractors will get caught out by IR35, which can lead to them paying higher levels of tax in line with employees, without receiving the same benefits enjoyed by employees.

Being subject to IR35 investigations can be time-intensive, expensive, and stressful, so many contractors are deciding that it is instead easier to make the move to umbrella as this ensures that they are exempt from IR35.

Forget about invoicing

Another reason that limited company contractors might be considering moving away from a limited company is that they are fed up with invoicing the client and chasing late payments. After all, as well as working on the contract at hand, limited contractors also have to organise invoicing and finances in order to get paid.

This can add an extra layer of stress and hassle to the contractor’s life, especially if the client is late to pay.

An umbrella company, on the other hand, takes care of invoicing and chasing payments on the contractor’s behalf, meaning there’s no need to worry.

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Avoid tricky tax calculations

What’s more, once the invoice has been paid, limited company contractors next need to put aside enough to pay their tax and National Insurance bill at the end of the year which requires a strong level of planning and preparation.

Then, the contractor will have to file for self-assessment. This can often be tricky and time-consuming, meaning many limited contractors end up paying an accountant to sort this for them which is an additional cost out of the contractor’s pocket.

With an umbrella company, however, the contractor is made an employee of their chosen provider. This means that the contractor is set up on the company’s payroll and as such their tax and National Insurance contributions are worked out and deducted for them. That means they pay the correct amount and can rest assured that their tax obligations are taken care of. 

Minimise admin and paperwork

As we have mentioned, limited company contractors must organise their own invoicing, finances, and tax returns.

These tasks require lots of paperwork and admin tasks which can take up a lot of the contractor’s time and energy. After all, the contractor must deal with communications from HMRC, their accountant, or Companies House.

An umbrella company takes on all these tasks for the contractor, from dealing with paperwork, admin to expense processing.

Stop covering holiday leave and sick pay out of your own pocket

Finally, limited company contractors have to cover the costs if they wish to take a holiday or indeed fall ill and cannot work.

For many, this is seen as a major drawback to contracting through a limited company as it requires clever budgeting and organisation to ensure that enough of the fee is saved to cover these instances.

 This isn’t the case for umbrella company contractors, however, who receive statutory benefits as employees of the umbrella company.

So, if you have decided to move from a limited company to an umbrella company, you will need to know what’s next.

Making the move to an umbrella company

The first step is to close down the limited company or alternatively keep it open as a dormant, non-trading company.

To close down the company the contractor will need to inform Companies House that they wish to dissolve the company and let HMRC know that they will be closing the company payroll and corporation tax schemes.

If your company is solvent and has funds of over £25,000 you may consider closing it through a Members’ Voluntary Liquidation (MVL) which allows you to close the company in a tax-efficient way, paying only 10% on profits over the lifetime of the business.

Once you have closed the limited company, the next step is to choose an umbrella company.

Choose the best umbrella company

The great news is that there are plenty of umbrella companies out there for contractors to choose between.

However, although it’s good to have a choice, this can make it difficult for contractors to know which company to go with.

That’s where Umbrella Broker comes in handy.

With our umbrella company calculator, you can simply enter your details and preferences and in just 2 minutes we will offer a list of umbrella companies that are best suited to you and your contracting needs.

We will show you the range of services and benefits you will get from each umbrella company, how much you will pay in umbrella company fees, how much you will take home each month and how much you will pay in things like tax, National Insurance and pension contributions.

By giving a detailed breakdown of each umbrella company, we ensure that you can find the best one for you. This means you can enter the world of contracting through an umbrella company with the best possible start.

To give it a go for yourself simply head over to our contractor calculator and find your perfect match in a matter of minutes.

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