If you have decided to move from your umbrella company and start contracting via your own limited company, there are a number of steps you will need to take to ensure this changeover goes smoothly.
Why move from umbrella to limited company?
Your decision to switch company structure could be for a number of reasons, for example:
- You starting contracting via an umbrella, which does represent a relatively hassle-free way of operating. Now, you want to switch to a limited company model for more control, typically more favourable tax rules, and more freedom.
- You were forced to work via an umbrella company – possibly as a result of the Off-Payroll (IR35) changes. Subsequently, you have a new contract with a client who is happy for contractors to work via their own limited companies.
- You are unhappy with your current umbrella company provider, and would rather try limited company contracting than another umbrella.
We have covered the limited or umbrella? question in a dedicated article on the site.
What happens when you make the switch?
In theory, the switching process should not be complicated. After you have given notice to your umbrella company, your umbrella should reimburse you for any salary and expenses you are owed. They should also return any holiday they have held back on your behalf.
Your umbrella company should also issue you with your P45 as you will be able to set up your own company payroll once you have incorporated.
There’s no need to wait until you’ve left the umbrella scheme. You can concurrently set up your new limited company, and hire a specialist contractor accountant.
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.
Timing your switch
From a tax point of view, leaving your umbrella is no more complicated than leaving your last employer when you were a permanent employee.
However, complications may arise if you decide to switch business structures mid-contract.
If you switch mid-contract, new contracts will need to be signed between you and your new limited company and your recruitment agent (or end client).
This should not prove to be a problem, but both your old umbrella company and your agent (or end client) will need to agree to this. If you are working direct, you may need to explain the situation to your client. How smoothly the transition goes, mid-contract, would ultimately depend on all the people in the chain acting reasonably and promptly.
- Read our guide to choosing between an umbrella company or limited company before switching business structures, as there are a number of considerations to take on-board before changing.
- If you have decided to move structure, try our guide to setting up a limited company, and our tips on how to choose a good contractor accountant.
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