Moving from an Umbrella to a Limited Company

When working as a contractor you can choose to operate through an umbrella company or as a director of your own limited company. There are advantages to both, but many contractors choose to move away from working through an umbrella company to form limited companies due to the potential cost savings, increased status with clients and protection a limited company receives.

This page discusses the reasons, practicalities, benefits and pitfalls of moving from an umbrella company to running your own limited company.

Why should I move?

There are many reasons to move from an umbrella company to a limited company, the most common are as follows:

1. Many start life as a contractor but are unsure if this could be a long-term prospect, so they decide to go the simpler option and worth through an umbrella company. Once contracting over 3 months or when they are turning over more than £25,000 a year, many decide that having their own limited company is more tax efficient.
2. A limited company gives a contractor a greater degree of control over their company affairs, enabling them to be more directly involved in developing and expanding the business.
3. The costs associated with running an umbrella company can be more expensive than running a limited company. For more details on how your take-home pay could be affected by moving to a limited company, for more information, please read our full guide to Limited Company vs Umbrella Company Take Home Pay.

What are the benefits?

There are a number of advantages of running your own limited company over working through an umbrella. Here are the most important ones to consider:

1. A more tax-efficient way of working – one of the primary reasons why so many contractors prefer owning their own limited company structure is that it offers greater opportunities for tax planning and tax benefits. This, in turn, means that a contractor can take home more money under the limited company structure than if they are working through an umbrella company.
2. Improved financial control – a limited company deals with its clients directly so a contractor has sole control over the business and its finances. Under the services of an umbrella company, a contractor must rely on the umbrella company to collect earnings and pay them accordingly.
3. Limited liability – a limited company means that its directors are not personally at risk of a financial loss if things do go wrong.
4. Improved status with customers – clients often view a limited structure in a more positive light for the air of respect, professionalism and status the limited badge gives a company.
5. Company name protection – once incorporated, a limited company’s name is protected and cannot be registered by any other person or body with Companies House. A word to the wise though, by registering a company with Companies House you are merely preventing other businesses from registering the same, or a very similar, company name to yours. Unless your company name is registered a trademark, it could be used by other businesses for marketing or other purposes.

Are there any disadvantages?

Some contractors avoid the transition to a limited company due to the reduced privacy that comes from filing company records and accounts through Companies House so that can be accessed by anyone. The administration responsibilities and increased accountancy fees can also be viewed as disadvantages, although it is worth remembering that the cost of using an umbrella company is often higher than the fees and tax planning opportunities available to most limited companies.

The practicalities of moving

The transition from an umbrella to a limited company should be fairly painless and akin to the process of moving into contracting from being a permanent PAYE employee. There are a number of steps to finalise this move.

Firstly, existing contractual arrangements must be checked to ensure there are no financial penalties for making the move to limited.

The umbrella company then needs to be informed of the decision to leave and they should issue the contractor with a P45, as well as any outstanding expenses and salary. In some cases, there may be a certain period of notice but this is often not the case.

Next, the process of setting up a new limited company begins via a specialist contractor accountant so that the contractor becomes the director and employee of the limited company. As part of the Nixon Williams service, we offer a free limited company set-up, please visit Our Services page for more information.

Most of the time it can be easier to make the move in between contract renewals, as any current contracts are signed between an umbrella company and a client. If the move is made mid-contract then the contract will need to be revised to show the new relationship between the limited company and the client.

Moving from an umbrella and a limited company should be a fairly straightforward process, and a good accountant will be able to ease the transition for you. If you would like to find out more, please contact a member of our New Business team on 01253 362 062.

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