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When working as a contractor you can choose to operate through an umbrella company or as a director of your own limited company. There are advantages to both, but many contractors choose to move away from working through an umbrella company to form limited companies due to the potential cost savings, increased status with clients and protection a limited company receives.
This page discusses the reasons, practicalities, benefits and pitfalls of moving from an umbrella company to running your own limited company.
There are many reasons to move from an umbrella company to a limited company, the most common are as follows:
There are a number of advantages of running your own limited company over working through an umbrella. Here are the most important ones to consider:
Some contractors avoid the transition to a limited company due to the reduced privacy that comes from filing company records and accounts through Companies House so that can be accessed by anyone. The administration responsibilities and increased accountancy fees can also be viewed as disadvantages, although it is worth remembering that the cost of using an umbrella company is often higher than the fees and tax planning opportunities available to most limited companies.
The transition from an umbrella to a limited company should be fairly painless and akin to the process of moving into contracting from being a permanent PAYE employee. There are a number of steps to finalise this move.
Firstly, existing contractual arrangements must be checked to ensure there are no financial penalties for making the move to limited.
The umbrella company then needs to be informed of the decision to leave and they should issue the contractor with a P45, as well as any outstanding expenses and salary. In some cases, there may be a certain period of notice but this is often not the case.
Next, the process of setting up a new limited company begins via a specialist contractor accountant so that the contractor becomes the director and employee of the limited company. As part of the Nixon Williams service, we offer a free limited company set-up, please visit Our Services page for more information.
Most of the time it can be easier to make the move in between contract renewals, as any current contracts are signed between an umbrella company and a client. If the move is made mid-contract then the contract will need to be revised to show the new relationship between the limited company and the client.
Moving from an umbrella and a limited company should be a fairly straightforward process, and a good accountant will be able to ease the transition for you. If you would like to find out more, please contact a member of our New Business team on 01253 362 062.