Chat with us, powered by LiveChat Transferring From A Limited To An Umbrella Company | WIS Accountants

Transferring From A Limited To An Umbrella Company – What Do You Need To Know?

What do you need to know when you are transferring from a limited to an umbrella company?
Table of Contents
    Add a header to begin generating the table of contents

    What do you need to know when you are transferring from a limited to an umbrella company?

    Operating as a Limited Company in London is strategic, can be beneficial financially and is the most common choice selected by the contractors. This helps business owners control the form of income they take in terms of salary and dividends which attribute to the taxes. It is one of the most significant advantages of having a limited company.

    Director or a shareholder of your limited company

    By being a director or a shareholder of your limited company, you can choose to take a small amount of salary from your company income and draw most of your income from the business in the form of dividends.

    This will help minimise the amount of National Insurance Contributions (NICs) you must pay, as dividends are not subject to NICs. As a result, you can take home more of your earnings.

    Having a limited company can have other exciting status benefits. Many clients, for instance, view firms with an ‘Ltd.’ in their name as it gives a more professional mindset which will lead to more business in some cases.

    Advantages of operating a limited company

    Having many advantages of operating a limited company, you may have many possible reasons why you would wish to shift your contract from your own limited company to an umbrella management company.

    This could be due to work on offshore contracts, your limited company may be facing legal, accounting and taxation issues or perhaps due to personal problems. If all your arrangements are relevant to the  IR35 rule, operating a limited company may not be the best tax-efficient choice compared to using a PAYE Umbrella.

    Most of all, many contractors can close their limited companies and subscribe to an umbrella company to try and avoid penalties from the current IR35 rules. The IR35 legislation applies in the private sector, which could lock thousands of contractors into high-tax, low-benefit arrangements.

    Considering the IR35 rule and other reasons mentioned above, you may decide to shift to an umbrella company from your limited company.

    An umbrella company directly employs agency workers for fixed-term contract workers. An advantage of working with an umbrella company is that they eliminate the pressure of ensuring IR35 compliance. You become an employee when you join an Umbrella Company.

    While it is not as tax efficient as in your own Limited Company, Umbrella companies offer a relatively stress-free way to contract.

    These may well suit the first time or short-term contractors or those who would instead not take on any duty related to administration. Working under an Umbrella Company also helps to determine your IR35 status a lot simpler. Difficulties will be minor within IR35 as long as you know that your NIC and tax will be calculated at the standard rate rather than on what you earn.

    Operating as an Umbrella Companies

    Umbrella Companies is an alternative when it comes to managing your own business. Umbrella Companies take care of the majority of the administration.

    This type of arrangement can appeal to new or short-term contractors as it needs less commitment than having your own Limited company.

    You can enter an Umbrella company and can leave instantly, whereas establishing a Limited Company requires more responsibility through your duties as a company director. Umbrella companies, however, are considerably less tax-efficient than operating through your own Limited company.

    Moving from a Limited Company to an Umbrella Company

    However, for whatever reason, if you have decided to shift from your limited company to an Umbrella company, you will need to consider certain vital factors which are highly important.

    This procedure is straightforward. You need to deliver a few essential details and documents. The umbrella company you selected will deal with all the administration on your behalf, such as dealing with your employer. Following the initial process, you will need to provide the umbrella company with timesheets or invoices continuously.

    They will charge your client, ensuring that you get paid on time in return for a service charge.

    Closing your Limited Company

    Before transitioning to an umbrella company, you need to decide whether you will close your limited company. You will have to follow the formal closing down of the company or keep the company in existence but dormant.

    Suppose you have decided to close your company before the transition to an Umbrella company. In that case, it is crucial to inform the Companies House as they need to commence their dissolution process. This process may take between three to six months. You will also need to tell HMRC as the Corporation Tax, and the company payroll needs to stop.

    Using a Members Voluntary Liquidation Service (MVL)

    Further, if you have registered for VAT, It is necessary to deregister for VAT.  In a situation where you decide to close your limited company while having greater than £35,000 in retained profits with the non-expectation of establishing another company that performs the same kind of business within the next two years, you should consider using a Members Voluntary Liquidation Service (MVL).

    The benefit of liquidating your company through a Members Voluntary Liquidation is that you can withdraw your assets from the company through the Capital Gains Tax instead of Income Tax which means you will be liable to pay less tax, around 10% on the remaining profits.

    Suppose you decide on the second option, which is to keep the company in existence, but as a dormant company, you need to set a date which it will continue as dormant and then complete all transactions on your account up to that date. Following this date, you need to close your company’s payroll and make payments for any outstanding tax is due.

    It would help if you convinced HMRC that you have ceased trading and do not plan to deal with any new contracts. Therefore there should be zero transactions made through the company. To continue dormant, you will have to submit annual accounts to HMRC and shortened accounts that show the liabilities and assets of the company.

    Contact WIS Accountancy

    Our professional accountants at WIS Accountancy Ltd. are here to assist you in making your decision on whether it will be beneficial for you to move into umbrella by providing you guidance on the relative pros and cons of both structures, taking into account your personal and organisational circumstances.

    Visit our Accountants in Essex for a no obligation consultation.

    Share This Post

    Request a Callback

    Request a Free Accounting Quote

    Would you like an accounting quote based on your requirements and business? Click on the button below and complete the form to get an accounting quote sent through to you.

    We’re available Monday to Friday (9am – 5pm)