An umbrella company is a type of employment business for contractors whereby the contractor completes contracts for end clients operating as an employee of the employment business/umbrella company. You do not own the company nor are you a director should you operate this way. If you don’t want the trouble of running your own company but do wish to take on contract work or all of your contracts are likely to be inside the IR35 legislation, then this is probably the option for you.

The Pros

By using an umbrella company, you have the least administration and responsibilities, it is easy to get started and to change trading styles later, and you do not need to worry about IR35.

The Cons

However, you do not benefit from the tax efficiencies of operating via a limited company and must pay a fee for the service, plus you are not a director or owner of a business and therefore lack control or the ability to promote yourself as a business.

The Taxes

By operating through an umbrella company, you will pay income tax and national insurance contributions through PAYE (i.e. the umbrella company will deduct this for you just as your permanent employee would) and it is paid on all of your income. You can, however, claim allowable expenses which will also be calculated by the umbrella company. Don’t forget that umbrella companies are companies taking on your administration and responsibilities and therefore incur a fee for their services. This fee and the applicable tax rules make working via an umbrella company the least financially attractive option.
As there is more to contracting than just how you operate, we will also be guiding you on how to source a contract, finance for contractors and sourcing an accountant, as well as some specific guidance for those heading down the limited company route.
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