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When initially setting up as a contractor you face a choice. Will you operate through an umbrella company or as a director of your own limited company? Many opt for the latter due to the potential benefits.
Changes to Travel & Subsistence tax relief legislation means contractors with umbrella companies have seen substantial drops in take home pay from April 2016. Many are reviewing their choice once again, as a result. Could now be the time for you to make the transition to contracting via a limited company?
In this guide, we cover:
The change to Travel & Subsistence relief rules affects claimable tax relief for movement between home and work. The modification applies to all workers supplied through intermediaries such as umbrella companies. Any contractors caught by IR35 – in other words, not meeting HMRC’s definition of “self-employed” – will also feel the effects.
If you are currently a contractor working for an umbrella company, do you see the ability to claim this tax relief as an attraction? If so, now might be a good time to re-evaluate the various other advantages available to limited companies.
As you can see, there are plenty of worthy reasons to begin planning the change. Soon, we’ll tell you how. There are a few things to consider first:
If you previously opted for contracting through an umbrella company, you’re probably already aware this path isn’t for everybody. The running of a company is an entirely different thing from being an employee in somebody else’s organisation. Ultimately, the responsibility falls on your shoulders to ensure everything remains on the books and in full compliance with HMRC. You may require a certain constitution to handle this responsibility.
Furthermore, your obligations are bound to increase upon setting up of your limited company. The best way is to find and hire a contractor accountant to assist in the new business-running duties. It is workable to manage your accounts yourself, but it is not always advisable.
The accountancy services on offer that you’re looking for are:
You should be sure to check which of these services your accountant’s fee structure covers. Having some help in this department really can make the difference in the smooth operation of your business.
It’s worth noting some contractors avoid making the change to a limited company because of a perceived reduction in privacy. The filing of your records and accounts with Companies House means anyone can access or read them. If for some reason you consider this to be a problem, you may want to hold back.
So you’ve decided to make the move. Thankfully, the transition should be pain-free. Certainly it is no harder than the process of moving from PAYE employment into contractor work.
1: Choose the time & inform the necessary parties
If you have a notice period to see out under your contract, you will need to give the appropriate amount of time to allow for the transition. If not, simply inform your umbrella organisation of your decision. You may receive a P45 form, but having one is in no way a requirement for setup of your company.
If you are currently in the middle of a contract, you may want to wait for a gap before the next renewal. Otherwise, your present contract – signed between the umbrella company and the client – will need review and alteration. Furthermore, any such adjustment would need to be signed off by both the umbrella company and the client.
Be sure to check the terms and conditions of your contract to ensure you won’t incur penalties before engaging in this step. It’s always good practice to chase, at this stage, any outstanding payments owed to you by the umbrella company as well.
2: Set up the limited company
The process of setting up your company is a simple affair, achievable with only some hours’ time investment when you hire an accountant. If you can find a specialist contractor accountant to handle the setup, even better.
You will need:
The costs of using an umbrella company for contracting purposes are higher than those associated with limited companies. April’s legislative changes have only exacerbated the gap between the models, affecting many entrepreneurs for the worse.
If that isn’t the deal breaker for you, then the numerous advantages available to limited companies – from tax planning opportunities to reduced liability – ought to get you thinking.
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