Contractor guide: Moving from a limited company to umbrella model in 2021

Contractor guide: Moving from a limited company to umbrella model in 2021

11 January 2021

Many contractors are likely to close their limited companies this year and subscribe to an umbrella company to try and avoid punitive new IR35 rules.

For the most part, limited company contractors love the tax advantages and the autonomy that comes with running their own personal service company (PSC). But a major shift in the way that IR35 legislation is applied in the private sector could lock thousands of contractors into high-tax, low-benefit arrangements.

If you tend to work very closely with your private sector clients and are at risk of being trapped in an ‘inside IR35’ contract, then switching to an umbrella company model of working could be the best move you make in 2021.

Working through an umbrella company means that you:

  • Don’t have to worry about IR35 judgements
  • Can enjoy the same level of autonomy that you would have as a limited company contractor
  • Enjoy some benefits of employment that are not available to limited company contractors

As an umbrella worker, you will pay PAYE taxes and National Insurance just as you would if you were caught in an ‘inside IR35’ contract. But you will also enjoy some employee benefits and you won’t have to worry about some of the administrative headaches that come along with running a limited company.

Moving to an umbrella company

Moving to an umbrella company is very straightforward. You will usually need to supply a few important details and documents and the umbrella company will take care of all the administration on your behalf, getting in touch with your employer or agency to set things up.

On an ongoing basis you will then need to supply the umbrella company with timesheets or invoices and they will bill your client, making sure you get paid on time in return for a small fee.

Closing your limited company

Moving to an umbrella company won’t necessarily affect your limited company. If you only expect to use an umbrella company temporarily - for one short-term contract for example - then it makes sense to keep your limited company but not trade through it temporarily. To do this you’ll need to let HMRC know that your limited company is dormant.

If you plan to move to an umbrella model more permanently then you should formally close your limited company. This involves a few more administrative steps, but reliable umbrella companies like Umbrella.co.uk will help you do this as part of the switching process.

Using a company like Umbrella.co.uk to help you close your limited company will help you withdraw capital in the most tax efficient way possible, giving you a healthy nest egg to take forward into your new venture.

For more information about moving to an umbrella contractor model or closing your limited company, speak to a member of the team today. Call: 0800 121 6513.