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Umbrella to Limited

Every day contractors ask us questions about tax and accounts, things to do with their Limited Company, or just general business questions. This is what we tell them.


Q: Do I get more take home pay with a Limited Company?

The vast majority do, so why not you? If you earn more than £25,000 a year from contracting and have many of the usual expenses of being independently engaged on a contract, then YES.

Not only does a Limited Company allow you to claim more expenses than under any other route, you can influence the timing of your income taxation, enjoy lower rates of corporation tax on “surplus” cash, reduce your National Insurance costs, and register for “Flat Rate VAT’- which helps most contractors. But also, check out Intouch fees for what you get. Umbrellas are seldom as low cost as they claim or appear. You can even reduce your professional fees.


Q: When should I switch to Umbrella?

As soon as you decide you want the extra benefits and flexibility of being Limited. There is no need to wait for the end of a contract or the end of your accounting year if you already have a company. The best time is when you decide flexibility, permanence and more take home pay outweigh the simplicity of using an Umbrella.


Q: Can I become Limited if I’m half way through a contract?

You may need to check the terms of your current contract, to ensure that there are no time restrictions when changing from Umbrella to Limited. We’d advise discussing this with your Umbrella company to ensure you don’t break any terms of your contract.


 

Q: Does IR35 affect me?

IR35 extends to all temporary workers and seeks to tax them as employees if they fall within the scope of the rules. As an Umbrella worker (employee) you are already taxed in this manner and there is little effect that your IR35 status has on your income. This may not be true for the negative effects of AWR! You can have a Limited Company whatever your IR35 status but if you are outside of the scope of the legislation, reduced taxation is one of the consequences. We will review your contracts for free as a client, or even for someone just thinking of joining us, and give you our opinion and advice as to how you can reduce your risk.


Q: Have I outgrown my Umbrella company?

Many consider that Umbrellas are a great place to start a contracting career, especially when the future is uncertain. At Intouch we agree with this view. However, there comes a time when contractors want to enjoy all the benefits of being independent and increase their take home pay. If you want the freedom and more independence in the medium term, with scope for planning and eventual retirement then you have probably outgrown an Umbrella. You can read more in our ‘Outgrown’ guide.


Q: What are the advantages of a Limited Company?

Intouch will help you to pay yourself via a combination of wages and dividends. As these payments carry different taxation levels you will retain more of what you earn while the tax man will still get all that he is entitled to. You will have more control, based on when you draw money from the company, over when taxes are due. You will have more flexibility in the way you plan your finances or invest money that remains in the company account. You also have advantageous options when it comes to appointing other directors, should you choose to.


 

 

Q: What do I need to do to become Limited?

You’ll need to set up your own Limited Company. Most contractor accountancies will be able to do this for you and help you at every step of the way (at Intouch we’ll set your company up for free within 24 hours!)


Q: Is there lots of paperwork and admin?

You will have more paperwork and admin than when you were contracting under an Umbrella company, but should you enlist the services of a contractor accountant, many have online software that only requires 15-20 minutes of your time per month to maintain. So whilst there are extra responsibilities when it comes to paperwork and admin, there are the tools to help you manage this quickly and effectively.


Q: Aren’t fees more expensive than Umbrella fees?

Many contractor accountancies include everything you’ll need to contract successfully within their monthly fee. Whereas your Umbrella may be charging you per week for a service which will effectively be stripped back to just a payroll service, contractor accountancies can offer so much more to ensure you have the capabilities to make the most from contracting.


Q: What happens if you decide to go back to permanent employment?

Lots of contractors who have their own Limited Companies decide to go from contracting to permanent and back again, so they have a couple of options. You can either put your company into a dormant state, or close your company altogether. Whichever option you choose your contractor accountant will be able to guide you through every step.


Q: What contact will I need to have with the client?

Whilst your Umbrella company would have contacted your client directly for contractual, invoicing and payment purposes, once you have gone Limited this is now your responsibility. Whilst this may seem daunting at first, the increase in control over your finances and communication with the end client will benefit your professional career and enable you to run your company exactly as you wish.


Q: What will happen come April 2016 if I stay with my Umbrella?

From April 2016 obtaining tax relief for expenses will become very difficult for Umbrella workers. Umbrella companies cannot pay you expenses without first deducting tax and NI. You can claim tax relief if you then complete a personal tax return and prove your expenses meet very strict criteria. You will automatically be unable to claim mileage, travel or subsistence for journeys to work if your client has any right to control what you do.

The removal of tax relief on expenses is very expensive for Umbrella workers who will suffer not only Income Tax between 20% – 45% but also additional combined NI Contributions of 22.67% on the expenses that are no longer allowed.