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Switching from Your Limited Company to an Umbrella Company

Umbrella Company

In recent months, more and more contractors are switching from running their own limited company to being employed by an umbrella company. In this article, we’ll look at the reasons why you might want to switch, and what you need to know to make a smooth transition from director and shareholder to employee.

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Why you might want to switch to an umbrella company

In most cases, this has been driven by the end client. In April 2021, most contractors will find responsibility for their IR35 status moving into their clients’ hands. Some have been informed that they’ll be assessed as inside IR35, and some clients have made a policy decision that they will no longer work with contractors who trade through their own limited companies. Whatever the reasons behind those decisions, the contractor is left needing a PAYE solution, and umbrella employment is by far the best option available.

You’ll be an employee, rather than a director and shareholder

The first thing to realise when switching from limited to umbrella, is that you’ll be employed. The other differences we’ll talk about in this article are a consequence of that. If you’ve been running your company for long enough to get used to the fine control it gives you, it may be quite an adjustment to suddenly have to consider your umbrella’s policies, systems and processes in your decision making. Choosing the right umbrella company could go a long way to smoothing this out.

Processing payments

Because you’re no longer being paid as a shareholder, you don’t have the option to take part of your pay as a dividend. All your pay will be treated as salary and will be subject to PAYE tax and NICs. This is why you might see some commentators advising you to negotiate an uplifted rate, to head off this potential drop in your take-home pay.

The exact process for getting paid will depend on your umbrella company and their relationship with the agency or client, but it will be broadly similar to the process for receiving payments into your limited company. Again, the main difference will be that you’ll need to follow the umbrella company’s internal process, and they will pay you personally as their employee, rather than making payments to your business bank account.

Umbrella company expenses

In general, you’re able to claim a broader range of expenses through your limited company than you can as an employee. Your umbrella company is bound by the same rules as any other employer and there are strict limits to which expenses they can pay you tax free.

In particular, travel and subsistence claims will be severely limited, unless your client has no right to supervise, direct or control how you complete the work.

Supervision, direction and control (SDC)

SDC is important because it can have a significant effect on which expenses you can claim as an umbrella employee. Journeys from home to work will be classed as normal commuting, unless you can show that no right to SDC exists, which means you won’t be allowed to claim travel or subsistence for those journeys. It’s the right to SDC that’s important, whether or not the client exercises that right in practice.

As your employer, your umbrella company is responsible for determining whether your assignment falls inside or outside SDC and a compliant umbrella will have a robust process for making that decision.

As far as HMRC is concerned, the default position is that SDC exists and it’s up to you and the umbrella to prove otherwise. This means that, while the umbrella will be sympathetic and will want to allow you to claim travel and subsistence expenses, they must look in detail at your circumstances and you should be prepared to answer detailed questions as part of their SDC process.

Other rules surrounding umbrella company expenses

There is a limited list of expenses that your umbrella company can reimburse you for tax free. These include:

  • Travel costs, excluding “normal commuting”
  • Relocation costs
  • Work related training costs

Most other expenses must be claimed on a self-assessment tax return at the end of the tax year. Your umbrella company may be able to help with the process, but will have no control over whether HMRC accepts your expenses or not.

Here are some things to remember when claiming expenses:

  • You must incur a cost: for example, if your client provides a vehicle and pays for fuel you should not expect to claim for mileage.
  • The cost must be incurred wholly, reasonably and necessarily in the course of performing your duties.
  • You should keep all receipts for any expense you intend to claim, in case HMRC ask for evidence

 Pension provision

This is one area where you’ll be used to having a lot of control, and pension contributions are likely to form part of your tax planning strategy as a director of your limited company. You may now be limited by your umbrella company’s internal policies, and this is where it’s important to choose the right umbrella.

As your employer, the umbrella company is required to provide and contribute to a workplace pension, and if you qualify you will be automatically enrolled onto their pension scheme. They have no choice about this, as they are required to enrol all qualifying employees. You should have the option to opt out if you decide to do so, once you’ve been enrolled.

Whether they will help you contribute to your own chosen pension is a matter for each umbrella company to decide, and it’s worth checking what your umbrella’s policy is before you sign up with them.

Insurance

While trading through your limited company, you will have been responsible for arranging your own insurance. As a minimum, you’ll have needed public liability, employer’s liability and professional indemnity insurance, and most end clients will have insisted that you had appropriate cover in place. As your employer, the umbrella company is now responsible for insuring you, and you should be covered by their insurance policies. They will be able to provide details of their cover if you need them.

The benefits of umbrella employment

As an umbrella company employee, you are entitled to the rights, benefits and protections afforded by law to all UK employees. These include:

  • Sick pay
  • Paid holiday
  • Access to a workplace pension
  • Maternity/paternity pay

In addition to complying with their legal obligations, some umbrella companies may offer additional benefits to their employees. For example, if you’re lucky enough to be an employee of Orange Genie Umbrella, you’ll have access to Orange Genie Edge, our extraordinary employee benefits platform with carefully chosen benefits and services designed to make a real difference to you and your family.

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If you have any questions or if we can help in any way please call our expert team on 01296 468 483 or email info@orangegenie.com or use our Limited VS Umbrella assessment tool

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