Switching from a Limited Company to an Umbrella Company
Why would you need to switch from running your own limited company to using an umbrella company? We discuss the possible reasons behind this and what you need to do to switch from a limited company to an umbrella –if you find you will be better at making the switch.
What is an umbrella company?
A PAYE umbrella company is a standard UK limited company, operated by a third-party supplier acting as an `employer` on behalf of its contractor employees. A contract is signed between the umbrella company and recruitment agency (or end contract is signed between the Umbrella Company and recruitment agency (or end client) on behalf of the contractor who will be carrying out the assignment.
The umbrella provides a payroll service to this service to its employees, processes all timesheets and invoices, and pay its employees a salary after allowing for deductions.
You can reclaim the cost of any legitimate business expenses you incur as a contractor, however, what you can claim depends on whether or not your contract is deemed to be under the `Supervision, Direction and control` (SDC) of your client. If your contract work is caught by the SDC rules, you cannot reclaim the costs of travel and subsistence.
How easy is it to switch from a limited company to an umbrella?
The ease of switching from a limited company to an umbrella company depends on what your plan on doing with your limited company. If you plan on trading through your limited company again in the future, you can keep your company active whilst using the umbrella company.
Why move from LTD to umbrella?
For contracts that fall within IR35, you may be better off operating through an umbrella company as it will no longer be tax-efficient to work through a limited company. Working through an umbrella ensures you remain compliant with all UK tax laws as the correct tax and National Insurance is deducted from your pay at source and sent to HMRC on your behalf.
There is significantly less paperwork and administration associated with working through an umbrella company compared to being a director of your own limited company. When you sign up to an umbrella company you do not have to chase payments or issue invoices –all you do is submit signed timesheets at end of each week/month.
Umbrella Company works well for short-term contracts as there is no tie-in period and both signing up and leaving are very simple. Umbrella companies also provide continuity of employment so that you can work on several short-term contracts back to back without it negatively affecting your tax code. Umbrella payroll is ideal for contractors who require an umbrella company for a single `self-contained` assignment, outside of their limited company.
Do you want to join an umbrella company?
Here are your options to close down your limited company, How you should close down your limited company will depend on your company’s financial situation Make your limited company dormant.
There may be a time when you want to take a break from contracting but keep your limited company for the future. It is possible to keep your limited company in a dormant state as long as you cease trading and no transactions are made via your business bank account.
If you want it to make an active company dormant, you’ll need to contact HMRC to issue you with a notice for a company tax return. You will be required to file yearly accounts for dormant company and Confirmation Statements to Companies House.
These will include share capital information, the company name, and the company address, and shareholder or guarantor details.
Making the company dormant
Another option you have if you wish to use an umbrella company but keep your limited company in existence is to make the company dormant. This is fairly straightforward but requires you to arrange for accounts for the active period to be completed up to the regular timeframe. Then from the date of dormancy, you would be required to file dormant accounts and Confirmation Statements. Again, your accountant can help with this.
Choosing an umbrella company
•Check that umbrella company is the right trading solution for you
•Dig deep into the umbrella company’s background
•Make sure you get the complete picture on fees
•Ensure you receive a full contract of employment
•Find out the process for claiming expenses
•How and when you get paid
•Verify that the service includes all your tax paperwork
•Can you leave without penalties?•Determine what help and support is