Following recent changes to rules around the tax deductibility of travel expenses, the tax advantages of changing from an Umbrella Payroll scheme to a Limited Company for your Contracting work are more than they ever been. To such an extent that Umbrella companies are actively trying to transfer their clients.
The actual transition from umbrella to Limited Company is actually very simple and more or less the same as it would be if you were transferring from permanent employment to being a Limited Company contractor.
The steps are as follows:
- Confirm with your client/s that they are happy for you to change the structure. This means that the Contract will change from being between Your Umbrella Company and your client to being between Your New Limited Company and your client.
- Setup a Limited Company – we can do this free of charge as part of our Contractor Accounting package.
- Have your accountant work out the best salary / dividend mix – As a Limited Company Contractor you would want to take a mixture of salary and dividends. The optimal mix depends on how much you’ve already earned from your umbrella this year. This is all part of our service.
- Amend your contract with your client to the new company name
- Obtain a P45 from your Umbrella, this will state how much pay you received whilst with the Umbrella and the amount of tax they deducted. This is vital for preparing your income tax return.
You need to be aware that running a Limited Company does come with additional responsibilities. A good Contractor Accountant should cover all duties for you though.
The advantages of Contracting through a Limited Company are that you can structure it so that you get full tax deductibility for your business travel, benefit from the VAT Flat Rate Scheme and avoid National Insurance by paying yourself in dividends.