A common question asked by many contractors is often “what is an umbrella company?” The general population may never come across such a business, however, for a freelance professional they can be very useful indeed.
To put it simply, an umbrella company acts as an employer for a self-employed worker who is contracted to an assignment. This is generally used by contractors as an alternative to setting up their own limited company – their main role being to organise your payment and tax contributions.
By working through an umbrella company you will technically be seen as an employee of that firm – this means you can be apart of PAYE and National Insurance Contributions.
Less Paperwork
A major benefit of an umbrella company is that they help remove the hassle of excess paper work. Once you have filled out your timesheet for the week, your umbrella will do the rest. It will invoice your client and chase up the payment. When it has received this your payment will be arranged and the necessary tax and NICs will be deducted.
Many contractors feel that an umbrella company allows them to focus on work, while the firm takes care of the rest.
Tax and IR35
Due to your employed status as a contractor working through an umbrella company, you will not be affected by IR35. You will be paid through PAYE and expenses and not dividends.
As most umbrellas will have a team of dedicated tax experts, it can be beneficial to know all your finances are taken care of properly. Many offer a personalised business manager who will help you to maximise your tax and national insurance savings.
Another benefit is that contractors do not have to employ an accountant solely to manage their finances as the umbrella company takes care of it on their behalf.
Employment Rights
A contractor who works through an umbrella company is also entitled to certain employment rights. These can include maternity and paternity leave, minimum wage and holiday and sickness pay – basically everything you would come to expect if you were working through any other employer.
Expenses
Umbrella companies may also offer a range of expenses that contractors can claim. These will often be for accommodation, food and travel. Individual firms may operate differently when it comes to expenses so it is best to inquire about this before hand.
Short-term Contractors
Those who are looking to contract for a short time may wish to work through an umbrella as it removes the need to set up a limited company. Perhaps their most attractive feature is that they simplify most of the processes that come with freelance work.
If contracting is a short-term option using an umbrella company may be the quickest and easiest route into paid work.
It also means that you wont have to dissolve a limited company if you do decide to return to the world of employment. This can be a costly and time-consuming process.
When choosing an umbrella company is it very important to see what they offer you as an individual. Companies can have different approaches to how they do things and it’s important that contractors pick one that suits their business needs.