Working as a contractor or a freelancer has its benefits. For one, you have the ability to work around your own schedule without having management to answer to. Your focus is your clients and they are the only ones who you need to please.
The tricky part sets in, however, when it comes to managing your own finances and keeping up with your legal obligations. From filing your tax returns accurately to ensuring that you are following the correct invoicing procedures, the administration side of your business will be your complete responsibility. Unless you decide to work under an umbrella company, that is.
When you make the decision to branch out and contract out your services, you have two choices. You can either register yourself as a limited company or you can seek the help of an established umbrella company.
Registering a company comes with many advantages but it also leaves your hands tied with the burdensome amounts of financial and administrative work it entails. For many contractors, this burden is too much and they decide to leave all of the legalities and paperwork in the hands of an umbrella company.
What Is an Umbrella Company?
An umbrella company gives contractors an opportunity to work for themselves but without the hassle of having to do all of the nitty-gritty paperwork. Essentially, you would become an employee of the umbrella company but you would still retain the freedom of an independent contractor.
Here’s how it works:
Umbrella companies work closely with recruitment agencies to source contractual work. When you join such a company, your services are contracted out to the end client or agency. Your sole responsibility is to then complete the project/s for the client accordingly and to submit the applicable timesheets to your umbrella company.
It’s at this point that they will invoice the end client (or agency) on your behalf. You will then receive your payment after the applicable tax payments, National Insurance contributions, and umbrella fees have been deducted.
After you have received your wages, the umbrella company will report your earnings to HMRC and pay your National Insurance and taxes on your behalf. This way, there will never be any loose ends for you to tie up and your admin will always be up to date. Plus, the tax man will be happy to have received all of your payments, and all your online filings will have been made on time.
What Are the Advantages of an Umbrella Company?
Handing over the running of your finances can always feel a bit daunting but if you do your research and join a legitimate umbrella company, then you can be assured that your earnings are in safe hands.
An umbrella company can feature the following benefits:
- In terms of administration, there is practically none. This gives you more time to work on your client base and provide a more efficient service.
- They are very easy to use. Simply send in your timesheets at the end of every week or month and wait to get paid.
- Umbrella companies are perfectly suitable for both short-term and long-term contractors who want minimal input when it comes to the fine print.
- You can rest assured knowing that your taxes and other legalities have been taken care of efficiently and promptly.
- They are a good stepping stone for first-time contractors. If you are unsure of your new position, joining an umbrella company is one way of testing the “contracting waters” without being overwhelmed.
- Payments by the end-client are generally transferred to the umbrella company faster than they would be made directly to you as the contractor. This is because the umbrella company will have a robust and efficient department dedicated to getting your money in on time.
- With an umbrella company, you can be up and running in a matter of hours and start working on your contracts quicker – meaning you will get paid faster
- Working via an umbrella company enables you to claim tax relief on expenses. We advise you, however, to be aware that the rules on these expenses have been tightened up by HMRC, so you will need to liaise with your umbrella company as to what is still permissible.
- Working as an employee under an umbrella company gives you the freedom to manage your own business strategy without being indefinitely tied to one company or client.
You might also want to consider the implications if you fall within the IR35 legislation. If this is the case, then the pros of contracting through your own limited company are considerably reduced and an umbrella company may be the preferred overall solution. Umbrella companies make all of their payments through PAYE meaning IR35 compliance is taken care of.
Are There Any Disadvantages?
While working via an umbrella company has many positives, you may want to consider the drawbacks so that you can make an informed decision about whether it is the right fit for you.
The drawbacks of using an umbrella company are:
- If you are looking to maximise your pay, then this might not be the best option for you. While many umbrella companies retain minimal fees, it is an expense that you could avoid.
- You will have to rely on the umbrella company to ensure that you are paid on time. This is usually not a problem, however, if you choose to work under an established company.
- You will have no involvement in the operation of the umbrella company itself. If you own a business then the final say will always be yours. If you are associated with an umbrella company, however, then they control your finances and your input is limited.
- Umbrella employees will not qualify for the same tax breaks as a limited company director.
For many, these disadvantages are a price worth accepting. An umbrella company offers freedom by removing onerous obligations that would otherwise require you to set up a limited company – giving you more time to organise your professional life as you see fit.
How Do I Know If an Umbrella Company Is the Best Option for Me?
Understanding what is the best option for you can be somewhat of a challenge. This is your future after all and you want to make sure you take the best course for you. It is not only which route pays you more, it is what option is best for you in terms of the lifestyle you want to have. Do you want more freedom at the expense of less money in your pocket, or do you want to maximise your earnings?
Why not give us a call to discuss what is the most appropriate decision for you. The team here can help on this and anything else tax and accountancy related and would love to hear from you. You can reach us on 01473 744 700 or email us on firstname.lastname@example.org.