There are many reasons why you might consider closing down your limited company and start contracting through an umbrella company, such as changing IR35 legislation in the private sector. Whatever the reason for switching, you will need to consider the possibility of shutting down your company and ensure you thoroughly research umbrella companies.
Umbrella companies are considered the easiest way for temporary workers to get paid – but do you know how they work? With the demand for umbrella payroll providers increasing, it is essential that contractors and freelancers understand how umbrella companies work.
Download our Ultimate Guide to Umbrella Companies to find out what to expect when you sign up to an umbrella company:
Reasons for moving from limited to umbrella
Here are some common reasons that contractors have for switching from being a director of their own limited company to using an umbrella company:
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 company 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 HRMC 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 the end of each week/month.
Umbrella companies work well for short-term contracts as there is no tie-in period and both signing up and leaving is 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.
You cannot be a director or do not want to become one
If you prefer a more hands-off approach to contracting, or for whatever reason are unable to become a contractor of your own limited company, using an umbrella company is a good alternative. It allows you to operate in compliance with UK tax law while still being able to enjoy some benefits of self-employment.
Do you want to join an umbrella company? Here are your options
Close down your limited company
How you should close down your limited company will depend on your company’s financial situation – take a look at our blog for more information about the different ways to close down.
As a general rule of thumb and if your situation permits, you will need to advise Companies House to begin the dissolution process – this can take up to six months. You must also deregister from the VAT scheme and notify HRMC that the company payroll and Corporation Tax needs to be stopped.
Keep your limited company open
Another option is to keep your limited company active – this may be something to consider if your current role is being reassessed as ‘inside IR35’ or if you are soon taking on an inside IR35 role.
You might want to keep your company active in case you start a role that is outside IR35 in the next year or two, or to gauge how the market will react to legislation changes in the long-term. Read more about upcoming changes to off-payroll (IR35) in the private sector.
Compare umbrella companies
Deciding which umbrella company to use can be confusing since there are hundreds of them in the market. This simple checklist will help you find the right umbrella company for you:
- The margin – the only differentiating factor between compliant umbrella companies is their margin. The margin the only thing that will make a difference to your take home pay – if there is another factor the umbrella company is using in their illustration to boost your take home pay, they are probably not compliant.
- The insurance cover – all umbrella companies should hold Employer’s Liability Insurance as it is a legal requirement. They should also have Professional Indemnity Insurance and Public Liability Insurance, which will offer sufficient cover for most assignments.
- Joining or leaving fees – some umbrella companies may charge a fee for leaving or signing up to their service. Look for a service that does not charge you a sign up or leaving fee.
- Compliance and accreditations – an accreditation such as Professional Passport or FCSA will show that the umbrella company abides by UK tax law and legislation that affects contractors.
- Tie-in period – some umbrella companies have a tie-in period which locks you into using their service for a certain amount of time.
- Technology – most umbrella companies use a secure online portal or app to allow you to submit timesheets, view your payroll information and download payslips.
Churchill Knight Umbrella
Signing up with our umbrella company is quick and painless, and should take around fifteen minutes from start to finish. If you have any unanswered questions, our consultants will be happy to run through these with you over the phone. If you would prefer to register in your own time, go to our online registration form to sign up.