Why Contract Through an Umbrella Company?

One of the first decisions for contractors to make is how to provide their services. There are a few options to consider. Such as working as a sole trader, forming a limited company, or working through an umbrella company. All of these options have their pros and cons, which begs the question – why contract through an umbrella company?

What is an umbrella company?

An umbrella company acts as a means of employment for contractors that is a middle ground between salaried employment and self-employment. Contractors joining an umbrella company will be required to pay a weekly or monthly fee. Paying for employment may seem illogical; however the benefits offered by umbrella companies can be a perfect fit for many contractors.

How are taxes handled under an umbrella company?

When you work with an umbrella company, you are considered an employee for legal and tax purposes. As you would expect with any other company, you will receive a tax code and pay your taxes based on how much you earn. Before you receive your pay, the umbrella company will deduct the taxes and National Insurance contributions you owe. Then deposit the rest as take-home pay into your bank account. Umbrella companies usually deduct their fees before calculating tax. This means you can recover some of this cost by paying less tax.

How do you pay your umbrella company?

Umbrella companies typically charge their fees in one of two ways – a fixed fee or a percentage fee. Some will charge their fees every week, while others every month. This is also true for your payment intervals.

A fixed fee is a flat fee charged every week or month. Generally, this fee will be £25 per week or £100 per month.

A percentage fee is not as cut and dry as its counterpart. With this fee, you will pay the umbrella company a set percentage of your overall income each week or month. Most umbrella companies charging this rate will set it at 5%. Although there are plenty that charge on either side of this. As it is a percentage, it will not take long before you end up paying more with this fee than with a fixed fee.

Because of this, most umbrellas prefer to charge a fixed fee as they are more appealing to contractors. However, there are enough umbrellas that charge a percentage fee to make it worth watching out for.

How do you receive your payment?

Every week or month, your umbrella company will deposit your take-home pay to your bank account in addition to sending you a payslip. This payslip will display your gross earnings. Followed by deductions such as umbrella company fees, taxes, and National Insurance contributions, then your total take-home pay.

The benefits of working with an umbrella company

There is a range of advantages to using an umbrella company, many of which can be especially useful for contractors just starting out in the industry.

Hassle-free contracting

It is well known that one of the necessary evils for business owners to deal with is administration and paperwork. When working with an umbrella company, however, this burden is handled on your behalf. Your tax and National Insurance contributions are paid directly from your earnings. Your payroll is managed for you, and you will have assistance with any other paperwork or administration. This has led to umbrella companies garnering the reputation as a means to contract without hassle, allowing you to focus on the more important task – contracting.

Eligible for employee protections

As you are considered an employee of the umbrella company you work with, you are eligible to receive the statutory payments afforded to salaried employees. This includes statutory sick pay, holiday pay, maternity or paternity pay, and a pension policy.

In addition to the legally required protections, many umbrella companies will offer employees lifestyle benefits. This can include child benefits, clinical counselling, legal support, and more. The benefits offered will vary from company to company, so be sure to check with your chosen umbrella company to get the best deal for you.

IR35 compliant

IR35 is a piece of legislation designed to combat “disguised employment”. Essentially, if you work for a company as a contractor without explicitly proving you are not an employee of said company, you could be found to be in breach of IR35 rules and subject to heavy financial consequences. Thankfully, when working for an umbrella company, you will not need to worry about working in accordance with IR35 rules as you are considered an employee. For more information on IR35, have a look at our article on the legislation and its upcoming reforms.

Claim back expenses

Claiming back expenses using an umbrella company used to be much more effective than it currently is. Before the 2016 Finance Bill, a variety of expenses you might incur on the job could be recovered, such as transport, training, accommodation, tools, equipment, and so on. Unfortunately, many of these expenses are now considered part of the day-to-day cost of doing business and so can no longer be claimed. However, this does not mean umbrella companies can no longer help in this regard. Umbrella companies will help you claim costs that have been pre-agreed with clients beforehand, oftentimes without these costs being subject to tax.

It is easy to leave

Umbrella companies are just as easy to leave as they are to join. If you decide that contracting is not for you, or would prefer to start contracting through your own limited company, then it is as simple as requesting your P45, and your umbrella company will take it from there. This can make umbrellas a good way to try out contracting, as you can usually stop as soon as you like. Bear in mind that some umbrella companies have minimum contract durations or charge an exit fee. Ensure you check your umbrella company’s policy on leaving to avoid any surprises.

Should you contract through an umbrella company?

As with anything related to the contracting industry, the answer to this question depends on your situation. As umbrella companies offer to handle the administration side of running a business alongside providing security, it might not be a perfect fit for veterans confident in their ability to handle these tasks themselves. However, if you are a newcomer to the industry, or would rather not put up with all the paperwork that comes with running a business, then working with an umbrella company could be the ideal solution.