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.
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.
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.
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.
With greater flexibility, higher job satisfaction and generally better pay, it is no wonder that so many of us are looking to leave permanent jobs behind and set out on our own.
There are many reasons to start contracting but before you do, firstly consider whether contracting is the right option for you. Contracting can carry with it many benefits, such as being your own boss, providing a more flexible work and personal life balance, higher take home pay, flexible working hours and a variety of tasks, locations and people to keep things from getting too mundane. But it can also come with tasks and responsibilities that not everybody is suited to dealing with, such as administrative burdens, compliance with relevant legislations, tax accountability, responsibility for your own training, marketing requirements to ensure you have work and financial planning to account for time out of work which will no longer be looked after by an employer.
It is important before branching out on your own to assess whether you have the confidence, a realistic approach and, most importantly, motivation needed for a successful contracting career.
All of the above advantages and disadvantages to going contracting are dependent on which trading style you ultimately choose. You will need to spend some time contemplating the different trading styles available to the self-employed worker and choose the best one for you.