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News and updates from industry experts

How and when to switch from Umbrella to Limited

By Contractor Hub, May 11 2016 03:00AM

For some people, they may decide to contract through an umbrella company if they’re trying self-employment out for the first time and want to see how it goes before fully committing.

If this is you, and you’re considering making the full commitment to a limited company, here’s a quick look at the differences between umbrella and limited companies:

Limited Company vs Umbrella Company

Working through an umbrella company means that you have less control (and therefore less responsibilities) compared to a limited company contractor, but this also means having a lot less benefits.

Your client or agency will pay the umbrella company that you trade through, and the company will then pay you. Because of this, you are essentially seen as being an employee of the umbrella, which means that you will need to pay the same National Insurance Contributions as a permanent employee, of course there is also the issue with the recent travel and subsistence expenses, whereby expenses have been significantly restricted for umbrella contractors.

For many people, the idea of running their own business can be quite daunting, especially if they have no experience of working in the contracting sector. Trading through an umbrella company first can be a great way for contractors to gain some experience before taking on the responsibility of running a business.

By setting up your own limited company, you have complete control over the running of the business and any financial affairs, as you will become both a director and a shareholder of your company.

For many people, one of the main reasons why they decide to become a contractor is due to the fact that they can potentially earn more money than a permanent worker in the same job role.

When it comes to the earning potential of the two methods of contracting, running your own limited company means that you are more likely to take home more of your take home pay.

For example, on average, a limited company contractor can expect to take home around 75-85% of their earnings. This figure is much lower with regards to an umbrella contractor, where you can expect to take home around 60-65% of your earnings.

How and when should I switch?

If you have decided to move onto the next step of contracting and are looking to start up your own limited company, the best time to do this would be when you are in between contract renewals. This way you can get around any terms and conditions you may be tied to with your umbrella company, as well as avoiding any penalties for leaving the contract early.

Forming your own limited company is a fairly short process – to start a business you will firstly need to register your name with Companies House. You will to set up a business account, as you are seen as being a completely separate entity to the company.

It’s also worth looking into the different types of insurance that you may need – for example, by law you must have an employer’s liability policy in place once you start hiring staff. This will help you to pay compensation should your employee become ill or injured because of the work they do for you.

Many people also find hiring a contractor accountant extremely useful, as they can be an excellent source of professional financial advice and guidance that can save you money in tax savings, as well as ensuring that you meet all of your legal obligations.

May 13 2016 09:55AM by Les Csonge

Good straight forward and sensible basic overview, of course there are some special considerations for certain sectors like Construction and the inclusion of the flat rate VAT options vary per sector but
overall rule of thumb is if you are earning £15ph / £120 per day / £550 per week or more it can be
financially beneficial to operate as a your own Ltd company.

The recent April Tax changes to Travel and Subsistence whilst under an Umbrella company need now also to be taken into consideration, the loss of these could also make it advantageous to move from Umbrella to own Ltd company - seeking professional and qualified advice is always a good starting point (as is obtaining a no obligation comparison figures illustration) ;-)

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