What is a contractor umbrella? Umbrella companies explained

9th May, 2018
What is a contractor umbrella? Umbrella companies explained

Contracting is a great option for those looking to increase their income whilst enjoying greater freedom and flexibility in their work.

As a contractor, you are essentially selling your skills to the end client much like they would buy resources from any other supplier. Yet, as a contractor who works alone, you don’t need to follow the same route to invoice for those services as a business that has employees, you have a choice. Contractors can choose from two primary options to invoice for their time, the traditional route of setting up a limited company, or by operating through something called an ‘umbrella company’.

If you are considering contracting through an umbrella company but want more information before making an informed decision, then ContractingWISE can help. We’ve summarised everything you need to know about contractor umbrella companies to help you decide if this is the best option for you.


How do Contractor Umbrella Companies work?

If you’ve never contracted before, an umbrella company might be an alien concept at first, yet a large proportion of contractors choose to work through a contractor umbrella due to the considerable ease of operation compared to running a limited company. Umbrella Companies appeal to many contractors because they take the hard work out of being self-employed.

If you use an umbrella company you become a PAYE umbrella employee and will be on the umbrella company’s payroll. The contractor pays a fee to the umbrella company, and in exchange the umbrella company will take care of the contractor’s financial and administrative needs.

While the umbrella company won’t act like a normal employer in terms of setting you work, the fact that they employ you enables them to provide you with statutory employment rights, benefits such as insurance and pay your taxes like a normal employer; but you’ll still get the freedom and flexibility you’d expect from working as a contractor.

This option makes contracting hassle free, as the umbrella company will take care of the administrative side of contracting. The alternative to using a contractor umbrella, working through your own limited company, is often more tax efficient, but you will have to sort out your own administration.


What does an Umbrella Company Do?

Contractors submit their timesheets to the umbrella company, who will invoice the client and chase for any late payments – essentially acting as an intermediary between the contractor and the client. The contractor umbrella will calculate and then deduct the correct amount of tax and National Insurance from the contractor’s pay, before transferring the correct wage payment along with a payslip.


Is Contracting Through an Umbrella Company Right for You?

Contractors are busy people. Umbrella companies are a useful option if you are new to contracting or if you don’t have time to carry out your contract work on top of undertaking the administrative duties required to run your own business.

If you’re moving from full time employment into contracting, the adjustment to running your own business could be a lot to handle. Using a contractor umbrella company may be the easiest way to transition from permanent employment to contracting because apart from submitting a timesheet, your payment and tax deductions are taken care of just like they would be if you were traditionally employed.

Contracting under an umbrella company will save you time and energy that could be focused elsewhere, either on creating productive, meaningful work or improving your skills further to get higher-paying clients on your next contract. There is no need to worry about running spreadsheets, creating and chasing up invoices, working out tax and National Insurance, running company accounts and organising VAT returns. You can have the peace of mind that your business is running smoothly in the background and focus on impressing your client.

Because of the ease of working through an umbrella company, this route can also be particularly advantageous if you’re only contracting for a short period, or if you are simply looking to work out if contracting is for you as a career. This option will allow you to avoid the process and costs of forming and then dissolving a limited company.


What’s the Alternative? Running your own Limited Company

Some contractors feel that working through an umbrella company is incompatible with being your own boss. If you don’t think this is the right option for you then the alternative is to set up your own limited company, of which you would be a company director.

Contracting through a limited company has its benefits too. A limited company can be the most tax efficient option for contractors who are more focused on money than time.

However, being a director comes with added responsibilities that can infringe on the freedom and flexibility that you started contracting for, so it’s important that you weigh up the extra duties against the benefits of running a limited company.

Unlike contracting through an umbrella company, running a limited company means that you will be responsible for your business finances and administration. Many contractors working through a limited company find it useful to hire an accountant to help with these responsibilities. ContractingWISE can help you source a good contractor accountant to help manage your business finances.

Although there is no monthly service fee as with umbrella companies, limited companies have more setup costs, but they can provide certain tax benefits too. In some cases, directors can claim back various business expenses such as accountancy fees and office costs.

Another key benefit of setting up a limited company is that it can provide a tax efficient option, if you’re outside IR35 then working through a limited company allows you to take dividends in addition to drawing a low salary.


Next Steps

If you decide using a contractor umbrella company is for you, make sure you’ve weighed up the financial differences to contracting via a limited company. Whilst the financial benefits vary, umbrella companies take the hard work out of contracting. If you think you will lack the time and resources to take care of your own business, then the chances are that the umbrella option might be for you, with an umbrella company offering a quicker and simpler contracting experience.

To explore your options and discuss what’s right for you, or for help and information, get in touch. With years of experience, ContractingWISE can help you make the right decision.

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