Contractors - Who's moved from a LTD to Umbrella ?
Discussion
Hi all,
My current lengthy contract is nearly at its end and Im searching job serve to see what's out there. Im currently outside IR35 but looking at the potential jobs on the market most seem to be inside. Therefore I need to start considering going to umbrella and what I need to set all this up.
Do I need to shut down my company if I choose go inside ? Can I just leave it dormant ? Are rates adjusted to reflect opting in ? Can I claim a certain amount of expensives if inside ?
Keen to understand the process and to hear about your experiences.
My current lengthy contract is nearly at its end and Im searching job serve to see what's out there. Im currently outside IR35 but looking at the potential jobs on the market most seem to be inside. Therefore I need to start considering going to umbrella and what I need to set all this up.
Do I need to shut down my company if I choose go inside ? Can I just leave it dormant ? Are rates adjusted to reflect opting in ? Can I claim a certain amount of expensives if inside ?
Keen to understand the process and to hear about your experiences.
I went back to employed 3 years ago, my understanding of the difference between Ltd and umbrella is just who owns the company that you are providing the service through.
IR35 is about how the employing company deducts tax/NI from the payments it makes and that those payments can be through either mechanism. Probably worth speaking to your accountant.
IR35 is about how the employing company deducts tax/NI from the payments it makes and that those payments can be through either mechanism. Probably worth speaking to your accountant.
You don't need to shut it down, company can be set as dormant if you don't trade during a year or receive any other income (e.g. interest on a war chest) then you can just file a basic set of accounts. It gets complicated if you have some inside and some outside in the same financial year as you then need to submit a full set of LTD company accounts, but also deal with umbrella and your personal returns need to account for both. Then you have all the downsides of LTD like exposure to risk of investigation, having to file/pay for returns, having to get insurances, etc, but also reduced profit as you're not using it the whole time. If you only have like a 3 month outside IR35 contract and the rest of the year inside, it may not make enough extra profit to be worth the bother.
Going umbrella is as simple as registering with one of them, but there may be a PSL of umbrella companies with any given end client or agency so I'd wait until you have a role lined up and see.
There are umbrella companies that can also run up a LTD for you, which might be best for mixing inside & outside contracts, but I've no experience to say how well that works.
Going umbrella is as simple as registering with one of them, but there may be a PSL of umbrella companies with any given end client or agency so I'd wait until you have a role lined up and see.
There are umbrella companies that can also run up a LTD for you, which might be best for mixing inside & outside contracts, but I've no experience to say how well that works.
I'm still going through my Limited company,i went perm in Sept for just one month but it wasn't worth the hassle as i still had to pay into my business account to cover my private pension/lease of my pick up which has another 2 yrs to run which meant i was financially worse off,so went back to limited from Oct.Im in construction and do site management along with my own carpentry refurb stuff,every thing i do now is always out side the IR35
How did you guys work out rate ? Let's say my current rate is £450 opt out, are you guys looking for higher opt in rates now ? Also a friend mentioned that is under an umbrella now and transfers a lot to his pension to reduce tax. Same with you guys ? Can you claim some form of expenses when under an umbrella....ella ! lol Sorry had to do that.. :-)
sbk1972 said:
How did you guys work out rate ? Let's say my current rate is £450 opt out, are you guys looking for higher opt in rates now ? Also a friend mentioned that is under an umbrella now and transfers a lot to his pension to reduce tax. Same with you guys ? Can you claim some form of expenses when under an umbrella....ella ! lol Sorry had to do that.. :-)
The brolly will give you a detailed statement.But as a rough guide to what you'd get on a month in contract:
-Multiply day rate by 228 (days worked in a year inc 25 holiday)
-Knock off 13% for employers NI (online calculator to get more accurate)
-Stick what's left into a PAYE salary calculator online.
I don't think you can claim any expenses other than stuff you would otherwise bill direct to end client like travel for specific work purposes, which is one big reason freelance lorry drivers are in short supply.
Umbrella setup:
Look at the calculators online, but for 99% of roles assume you cannot claim expenses*.
Take the rate that is being quoted and confirm with the agency that it is the gross rate payable to the umbrella (it usually will be). From that, deduct:
- employers NI
- apprenticeship levy
- employers pension contribution
- umbrella margin
What is left will be yours, but will then be subject to:
- employees NI
- income tax
- employees pension contribution
- it's possible a proportion will be held over as "holiday pay" too, although some pay if up front as "advanced holiday pay"
There is very little wiggle room in the above, as your colleagues have mentioned, maximising your pension contributions is the main vehicle for tax avoidance as these contributions are either taken out your gross pay received from the umbrella (saving you tax and NI - and them NI which you won't get), or you can put into your personal pension and reclaim the income tax.
There will always be exceptions:
- my current role (and a handful of others I know of) the rate quoted is after ErNI/Ap levy/margin/holiday pay but ultimately it's just playing the numbers a different way
- you mention expenses - if these are genuine expenses a permanent employee could claim or you had previously recharged to your client (e.g. travel & subsistence claims when working at a non-standard client site at the request of the client) then you should be able to claim these via the umbrella who will claim them from the agency/employer.
It's likely your client or agency will only work with a PSL so you may be limited in your choice of umbrella. If salary sacrifice to you SIPP is important then you need an umbrella that will do this.
Your Ltd:
You can keep it running should you foresee a requirement in the near future.
You can dissolve it; if you have a substantial warchest then doing this via an MVL is tax efficient however it does have a 24 month "no phoenixing" effect.
You can make it dormant; however I believe this means ZERO activity, so no transactions whatsoever at the company bank account.
Finally, rates. My 2p is that it is the same as it has always been. There are good rates, bad rates, and ones that really take the mickey. Some places expect you to go from £450 outside to £450 umbrella, others are increasing the rate. Depends how good you are and how badly you need a role as much as it ever has.
Look at the calculators online, but for 99% of roles assume you cannot claim expenses*.
Take the rate that is being quoted and confirm with the agency that it is the gross rate payable to the umbrella (it usually will be). From that, deduct:
- employers NI
- apprenticeship levy
- employers pension contribution
- umbrella margin
What is left will be yours, but will then be subject to:
- employees NI
- income tax
- employees pension contribution
- it's possible a proportion will be held over as "holiday pay" too, although some pay if up front as "advanced holiday pay"
There is very little wiggle room in the above, as your colleagues have mentioned, maximising your pension contributions is the main vehicle for tax avoidance as these contributions are either taken out your gross pay received from the umbrella (saving you tax and NI - and them NI which you won't get), or you can put into your personal pension and reclaim the income tax.
There will always be exceptions:
- my current role (and a handful of others I know of) the rate quoted is after ErNI/Ap levy/margin/holiday pay but ultimately it's just playing the numbers a different way
- you mention expenses - if these are genuine expenses a permanent employee could claim or you had previously recharged to your client (e.g. travel & subsistence claims when working at a non-standard client site at the request of the client) then you should be able to claim these via the umbrella who will claim them from the agency/employer.
It's likely your client or agency will only work with a PSL so you may be limited in your choice of umbrella. If salary sacrifice to you SIPP is important then you need an umbrella that will do this.
Your Ltd:
You can keep it running should you foresee a requirement in the near future.
You can dissolve it; if you have a substantial warchest then doing this via an MVL is tax efficient however it does have a 24 month "no phoenixing" effect.
You can make it dormant; however I believe this means ZERO activity, so no transactions whatsoever at the company bank account.
Finally, rates. My 2p is that it is the same as it has always been. There are good rates, bad rates, and ones that really take the mickey. Some places expect you to go from £450 outside to £450 umbrella, others are increasing the rate. Depends how good you are and how badly you need a role as much as it ever has.
Extremely broad brush rule of thumb, but to match £500 / day outside IR35, you need at least £800 / day inside IR35.
The pension thing isn't the magic wand that some people think it is:
Firstly, you won't be able to access the money until you're 55, 57, 60, 70 or whatever age the Govt decides - it's 55 now, changing soon and who knows what it will be in 20 years time
Secondly, you'll pay tax on the way out - maybe as much as 55% if you exceed the lifetime allowance.
Thirdly, no-one can say what changes the Govt will make to pension taxation in the future.
The pension thing isn't the magic wand that some people think it is:
Firstly, you won't be able to access the money until you're 55, 57, 60, 70 or whatever age the Govt decides - it's 55 now, changing soon and who knows what it will be in 20 years time
Secondly, you'll pay tax on the way out - maybe as much as 55% if you exceed the lifetime allowance.
Thirdly, no-one can say what changes the Govt will make to pension taxation in the future.
sbk1972 said:
Thanks UpTheIron
I agree on your last sentance, some of the rates are just pi55 takes. You mention holidays....do I get paid holidays then if part of an umbrella ? Or do es the umbrella hold back a percentage to cover holidays ?
Makes you wonder if going perminate is the way forward.
As you are an employee of the umbrella they are obliged by law to give you paid leave. They hold back a percentage to cover this. I spent 20 years contracting, almost exclusively (genuinely) outside IR35 and declared inside roles as just that and paid tax correctly. I went perm and MVL'd in 2019 before then moving into an "inside" role last year. I was approached by the organisation in question so I had the upper hand in negotiations but their standard setup is/was:I agree on your last sentance, some of the rates are just pi55 takes. You mention holidays....do I get paid holidays then if part of an umbrella ? Or do es the umbrella hold back a percentage to cover holidays ?
Makes you wonder if going perminate is the way forward.
- day rate quoted to me
- 16.07% added to give 36 days paid leave (28 + 8 bank holidays)
- 13.8% + 0.5% added (to 116.07%) to cover ErNI and Ap Levy
- £5.89/day added to all of that to cover the minimum employer pension contribution on eligible earnings
That turns £750/day into something like £1000/day.
Most agencies will be quoting the higher figure and then the umbrella deducting all the above (they have no choice). Out of the lower figure (£750 in the example above) you still need to pay Employee NI, income tax and pension (autoenrollment).
For me, the current setup is still better than permanent employment (with less of the politics) but it is much more expensive for the employer than if I was outside IR35 - i.e. I'd take a lower rate as I can manage my income tax & NI more efficiently. I've not done the sums but the £500/£800 example above will possibly be correct for sum, depending on how much you can afford to leave in your company/live as a lower rate tax payer etc.
The rates and clients that take the mickey have always been there:
- a laundry list of skills and experience that is £600/day all day long but they are offering £300 has always happened and there is always somebody desperate enough, or a chancer who might get away with it, hang around long enough to skill up and then move on.
- now those same clients are just paying the same and reducing the take home of anyone desperate enough to take the role.
- ultimately the market sets the price, and if these roles get filled then fair enough.
I get "advanced holiday pay", meaning the 16.07% is added to my day rate and paid in my salary, meaning I don't get "paid holiday" as such as it's already been paid to me.
omniflow said:
The pension thing isn't the magic wand that some people think it is:
Firstly, you won't be able to access the money until you're 55, 57, 60, 70 or whatever age the Govt decides - it's 55 now, changing soon and who knows what it will be in 20 years time
Secondly, you'll pay tax on the way out - maybe as much as 55% if you exceed the lifetime allowance.
Thirdly, no-one can say what changes the Govt will make to pension taxation in the future.
Valid points, but for someone young with little pension, or someone approaching an age where they begin to think they might make it to pensionable age its a useful wrapper. I didn't smash £40k a year in when I was in my 20's - when in hindsight I could have - but I did in my 40's - but I certainly won't be doing so in my 50's because of said lifetime allowance (and hopefully because I'll be retired!).Firstly, you won't be able to access the money until you're 55, 57, 60, 70 or whatever age the Govt decides - it's 55 now, changing soon and who knows what it will be in 20 years time
Secondly, you'll pay tax on the way out - maybe as much as 55% if you exceed the lifetime allowance.
Thirdly, no-one can say what changes the Govt will make to pension taxation in the future.
IMHO it's a balancing act between getting cash out the Ltd in a tax efficient fashion so you can spend it (this bit is getting harder), then getting it out into a pension, and leaving it in the Ltd with a view to winding up or drip feeding over many years. It's all jam today v jam tomorrow [that the government may decide to take away of course!]
Olivera said:
A slightly pedantic point, but working for/via an Umbrella has absolutely nothing to do with being inside IR35. In fact it's pretty much impossible to work for an Umbrella and also be inside IR35.
They may be mutually exclusive as contractual arrangements go, but it's disingenuous to claim they are unrelated when they are alternate means to achieve the same intent namely to tax off payroll workers as employees of the hirer.Richieboy3008 said:
I went from Ltd company to being a PAYE contractor April last year. No adjustment in day rate, although I do now get a small pension. Overall I'm down about £700 per month, which hurts.
For those of you with kids and separated, how does child maintenance work if you move away from self assessment return based to salary.As if still a contractor and lose your contract, will still need a buffer.
hyphen said:
For those of you with kids and separated, how does child maintenance work if you move away from self assessment return based to salary.
As if still a contractor and lose your contract, will still need a buffer.
That would cause somebody a headache if earning a wedge of money in one tax year and then on the bench the next, just as the CMS update the calculation to reflect the rise...As if still a contractor and lose your contract, will still need a buffer.
So getting dragged into the IR35 thing on my new contract and need to go via one of 2 umbrella outfits as determined by the client. I have managed to avoid it so far & will keep the LTD going as it has other income streams.
What is the deal with travel expenses, I am contracted to be home based, for security reasons some meetings on client sites will be required, will be train journeys to those sites mainly. The client will not pay for this expense. Is it just suck it up or do I keep all the receipts and claim tax relief at the end of the year?
What is the deal with travel expenses, I am contracted to be home based, for security reasons some meetings on client sites will be required, will be train journeys to those sites mainly. The client will not pay for this expense. Is it just suck it up or do I keep all the receipts and claim tax relief at the end of the year?
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