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Umbrella Payroll or Limited Company

10 - 05 - 2021

You have been working through an umbrella company on various contracts and now wish to  start contracting through your own limited company, there are a few steps you will need to take to ensure any changeover you take goes smoothly.

Should you move from an Umbrella payroll to a Limited Company?

You’ve been considering switching to a company structure and this could be for a number of reasons, for example:

·         You started working on contracts and were advised to work and be paid through an Umbrella payroll company, which does represent a relatively hassle-free way of operating. However, you are unhappy with your current Umbrella company provider as using this model has impacted your take home earnings.

·         Now, however, you are considering switching to a limited company model for more personal control, typically more favorable tax rules, and more freedom.

·         You are able to obtain new contracts with clients’ who are happy for contractors to work through their own limited companies.

What would happen when you make a switch from Umbrella to a Ltd Company?

Logically the switching process isn’t that complicated. After you have given notice to your Umbrella company, your Umbrella company should reimburse you for any salary and expenses, (if any qualify), you are owed, they should also return any accrued holiday pay they have held back on your behalf.

Your Umbrella company should also issue you with your P45 after your termination date, as you will be required to set up your own company payroll once you have incorporated.

 

Timing your switch

There’s no need to wait until you’ve left the Umbrella scheme. You can concurrently set up your new limited company, and engage with a specialist accountant to assist you.

Check the terms and conditions for your current umbrella company service, as there may be penalties to pay or a notice period you have to provide before making the move.

From a tax point of view, leaving your umbrella is no more complicated than leaving your last employer when you were a (PAYE) permanent employee.

However, complications might arise if you decide to switch business structures mid-contract, and while the recruitment agent and/or end client agree, new contracts will need to be signed between you and your new limited company and your agency (or end client).This should not prove to be a problem, how smoothly the transition goes, mid-contract, would ultimately depend on all the people in the chain acting reasonably and promptly.

Multiple Contracts:

It is possible that you are able to work on several contracts at the same time, and these could be as a Limited Company, and you may also at the same time work, on a contract(s) as Self Employed. Accountants have packages that support and allow you to work through both models, keep you compliant and assist you in keeping your tax affairs in good order.

 

To discuss various trading options available to you.

 

contactus@foremansllp.com 

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Fixed Data

Assumptions

General                                                                                                                              

• The user is over 21 and subject to tax in the UK
• The user wishes to minimise their tax liability
• The user is subject to national insurance i.e.he/she is not over retirement age
• Only current tax rates and limits are applied
• No tax mitigation payments are made e.g. pension contributions
• Only 3 digit letter 'L' tax codes shown in the drop down list can be entered 
• The user does not have a turnover greater than £100,000 where fewer reliefs and or higher taxes may apply

Expenses

• All miles claimed as expenses are for business use using a personally owned car or van
• All other expenses claimed are wholly, necessarily and where appropriate exclusively for the benefit of the business

Foremans LLP Charges

• Foremans fees associated with Limited Company, Sole Trader or Umbrella are as per published rates
• Foremans current Service Costs are allowed for in all calculations.

Holiday Pay

• Holiday pay is accumulated week by week by Umbrella or Agency employer but paid out during the year

VAT

• Limited Company or Sole Trader will be VAT registered
• Limited Company or Sole Trader will take advantage of Flat rate VAT
• Flat rate applied includes the benefit of the additional 1% applicable to the first year of VAT registration

Limited Company Conditions

• One director / one shareholder in a Personal Service Company
• Director of Personal Service Company elects to vote for 100% dividend after salary, costs and expenses
• Director's salary is maximum salary to the primary threshold for NI
• The Limited Company is trading normally i.e it is not subject to IR35 and is not a Managed Service Company

NOTES

• The Current tax rates are taken from the Fixed Data Table
• The current Value Added Tax Rate is 20% and is applied to all invoices and expenses as appropriate
• The Director's Salary is fixed in relation to National Insurance thresholds. Higher Rate Taxpayers should consider the advantages and disadvantages of a larger annual salary or bonus
• Higher Rate Taxpayers may wish to consider the advantages and disadvantages of shared ownership of their business
• Users with a tax code other than three digits and letter "L" may telephone or email our Development Department to request a detailed calculation
• Generally the use of an Umbrella rather than an Agency payroll is only efficient if sufficient weekly expenses are allowable and claimed
• The expenses claimed under an Umbrella should not prevent the proper operation of National Minimum Wage