Working through an umbrella company is a great option for many contractors starting out, but at some point it’s usually a good idea to consider switching from Umbrella to Limited. But when?

A major part of working for yourself is choosing the right way of doing so. Many people start out as sole traders, for example, or contract through an umbrella company. However, as your business and earnings grow, you might find that you need to consider forming your own limited company.

Doing so is quite a big step, and while it’s not as complicated as it might seem, it’s important you do so at the right time. If you’re at the right place in your self-employed career, going limited can dramatically increase your take-home pay, as it changes how you are taxed.

So, are you ready to switch from umbrella to limited? There are pros and cons to both options, so what’s important is that you work out what’s best for your specific situation. Here is an overview that should help, although if you need more advice you can always contact Brookson for a free consultation.

Umbrella companies

The main benefit of working through an umbrella company is the simplicity of doing so. For example, setting one up is easy. You simply sign a contract with the company, and it in turn contracts out your services to other businesses. This means you don’t have to worry about setting up your own Limited company.

The level of day-to-day admin is also fairly minimal as an  . You might have to find some of your own work and review your contract from time-to-time, but for the most part you will find that you can focus on completing your work and not worry about any other aspect of self-employment.

Of course, the downside of having little responsibility is that it comes with little control, especially when it comes to your finances. Your umbrella company will handle how you are taxed and paid for things like sickness and maternity leave. While this can be convenient, it leaves you with few options.

Then there’s the money. Working through an umbrella company is not very tax-efficient, as deductions will be made via pay-as-you-earn. This is the same system that would be in place if you were a standard employee, meaning you will not be taking home any extra proportion of the money you’re earning.

The umbrella company you are working through will also take a cut of the money. While it will not necessarily be a huge amount, this combined with tax will still mean you’re only taking home around 67 to 76 per cent of the money you earn. This doesn’t mean you’ll be impoverished of course, it just means you could be making more.

Limited companies

Going from umbrella to limited is usually accompanied by a rise in take-home pay, as it is by far the more tax-efficient option. You will count as the director and sole shareholder of your company, so there are plenty of extra expenses you can claim. You can also control how much of a salary you draw, meaning you have less tax to pay overall.

This means forming a limited company is much better for your finances. While contractors working through an umbrella company can expect to take home between 67 and 76 per cent of the money they earn, those using a limited company will receive around 81 to 86 per cent.

Of course, there are costs to all this, mainly an increase in administrative tasks. As owner of a limited company, you have responsibility for your finances, meaning you will have to chase up payments from your clients and make sure your tax returns are accurate.

You will also have to set the business up in the first place. This is fairly simple, requiring you to submit your company’s details to Companies House, but it is still administrative work many people would rather avoid. However, it is usually seen as worth the money you will save.

The added control can also be incredibly useful. For example, if something goes wrong or you’re anticipating a particularly lean period, you can adapt and alter your financial situation. If you pay for an accounting service, you will be able to navigate these financial issues with relatively little effort.

For help with switching from Umbrella to Limited or to set up a Limited Company contact Brookson One and book your free consultation.