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Is an umbrella company the way to go?

Should concerned contractors switch to an umbrella?

With the IR35 private sector reforms just around the corner, there is concern from contractors about how these changes will impact their working practices. But your contract being deemed inside IR35 by your client doesn’t need to spell the end of self-employment for you. Far from it, in fact. 

Instead, an umbrella company could be a good alternative if you’re looking for a new way of working without the worry of IR35, or you want a solution which gives you the same freedoms of contracting through a limited company without the responsibility of directorship.

In this article, we’ll outline how you can switch to an umbrella and why this might be a smart decision. 

What might IR35 reform mean for your limited company?

The upcoming private sector reforms are set to mirror the public sector reforms (with an exemption for small businesses) and mean that contractors will no longer be in charge of determining the IR35 status of their assignments. Instead, the responsibility will fall to the end-client.

If your assignments are caught inside IR35, running a limited company may not be the most tax-efficient option for you. This is because your end-client (who will effectively be acting as your employer) will deduct tax and National Insurance on your behalf before you’re paid.

After the public sector reforms, and as a way to mitigate their responsibility, many end-clients have simply applied a blanket approach to contractors and deemed them all inside IR35. There is a fear that this too will become commonplace in the private sector from April 2020. Needless to say, it has raised a number of questions about what the future holds for limited company directors.

Many contractors are understandably asking what they should do with their limited companies. If you’re only looking to work under an umbrella for a short period of time, making your limited company dormant could be the easiest option. When you make your company dormant, your financial responsibilities will be minimal. You will just need to prepare your Annual Accounts and Annual Confirmation Statements. Some contractors are turning to company dormancy as this will allow them to easily continue trading again in the future.

How does operating through an umbrella work?

Working under an umbrella company is simple and there are just a few steps involved…

Sign up with an umbrella company 

Once you’ve found an umbrella company, you will sign a contract with them and become an employee of theirs. Your umbrella company will also sign a contract with the recruitment agency.

Submit your timesheets 

You will need to submit timesheets to the umbrella company, outlining the number of hours you have worked and any expenses you have incurred. The umbrella company will bill your agency for these hours on your behalf.

You get paid 

Your umbrella company will pay your wages directly into your bank account, after deducting tax and National Insurance on your behalf, alongside a margin to cover administration costs. You will also be issued with a payslip.

Looking for an umbrella company?

If you decide to work under an umbrella for a short period of time, Nixon Williams are well-placed to help. Though Parasol, their sister company, they are able to offer a comprehensive umbrella solution. Find out more about what’s involved and what you need to do via their website.

By Nixon Williams

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10 thoughts on “Is an umbrella company the way to go?”

  1. S H

    Yeah, an Umbrella company is the way to stay self-employed if you don’t mind paying nearly 50% of your day rate in taxes, fees etc whilst having none of the rights and benefits that permanent workers who have a much smaller tax burden enjoy!

    • Rick Fryer

      I agree with all bloggs on here hence I have now wrapped up my Ltd Company and taken permanent employment. I really can’t see the benefits anymore of contracting. This Government theft programme will backfire as I suspect I am not going to be the only one.

  2. Maria Griffin

    IR35 umbrella working is the biggest crock ever. Just going through it now . No sick pay, no rights and pension (unless I pay more to the umbrella company) and almost 50% of my income gone…on 2 insurance payments,levies and to 2 agencies …the employment agency and the umbrella company……feels like feeding the parasites

    I can see why so many in the public sector have switched to permanent employment. I will too as soon as I get the right job

    IR35 will decimate the contract industry and prove worse for employers in the long run as they will lose flexible highly trained motivated workers

    There could have been a solution to pay more tax without this …which makes one an employee without any of the benefits of employment and a contractor without any of the benefits of contracting. I will be working alongside permanent staff at the same ‘grade ‘who will have an excellent pension and sick pay/holiday pay ..while the agencies and insurance feeds into my salary

    Contractors have been sold down the river

  3. Ron

    How’s about asking the end client to do fixed term employment on same rate? Let them face some of the pain of being inside IR35. This would save the affected contactor the monthly umbrella fee and also less bureaucracy dealing with client agency and umbrella.

  4. Mike

    Losing ‘nearly 50%’ is the optimistic view. I think that we will pay 13.8% employers ni plus 20% tax plus 12% employees ni on pay up to the higher rate threshold and 13.8% plus 40% tax plus 2% employees on pay above the threshold. Plus the umbrella company fee, minus company expenses (heat and light etc.). I think we will be lucky to get 40% of our original day rate.

  5. Alvin Edyvane

    Umbrella is a process, not a company.

    People recommending payroll solutions to assist people being able to continue contracting need to educate themselves on the solutions/differences.

    If you are self-employed and want to keep contracting, find a decent payroll business that operates a GENUINE self-employed solution/model, NOT Umbrella.
    Nothing will change with your deductions and you will only be deducted the relevant tax which is stipulated by the HMRC, 0% if you are gross registered.

    Look at http://www.geniusmoney.co.uk

    • TheWord

      I think its you that needs to educate yourself rather than coming on here with little understanding

      Contracts are deemed inside ir35 by the employer and that is how the treasury wants contracting to go

      A contractor has no say in the matter if the contract is set inside IR35 .And once inside then the contractor must work as a PAYE
      Its not a matter of declaring oneself as self employed !!!

      I also learned today that the Umbrella company is forcing me into their pension scheme and I cannot contribute to my preferred pension provider !!!

      Every kick back they can get as they screw me out of money

  6. TheWord

    The Employer only uses certain agencies ..they want an easy life..

    The agency works with only 5
    Umbrella companies (and I ‘m sure get kickbacks)

    While the umbrella company only work with certain pension companies

    Its all sown up !!!!!!

    The contractor gets very little say in the process

  7. Dave

    Contracting as is many things in life is risk and reward. The government will not only take away our reward but give it to themselves.
    We are left with risk.
    But as always, it is even worse than that, as our risk is actually increased by removing the use of our limited companies which we can count on. Unlike many unscrupulous umbrellas.
    Recently a contractor who was using an umbrella told us that after he had not been paid for 3 months, said umbrella just disappeared.
    Also recently I received an email/advert from an umbrella where on their website they had a recommendation from IR35 experts/insurers Kingsbridge. I called Kingsbridge to confirm but they never heard of the umbrella. Upon revisiting the umbrella’s website the recommendation had gone.
    Now tell me that our government cares anymore than some more unfortunate country?

  8. Ron

    Is someone suggesting we pay taxes like perms, then pay umbrella fees and insurance out of CLEAR EARNINGS?! this is outrageous. I’d like to make a few suggestions to my fellow victims:

    1 if a client deems you inside ir35, insist they pay same rate but on fixed term employment contract. This will save umbrella and insurance and accountant. If they dont like that then find the contractor outside ir35!
    2. Ask that some of the money is paid as employer contribution to the contractor pension fund. That’s totally tax free!
    3. I can only hope that recruiters band together to scream at gov that these changes will make recruitment companies bankrupt and will put thousands on the streets.
    4. I would recommend anyone without work because of ir35 to sign in as unemployed. Push the stats up, get NI paid, get pocket money from gov and if needed a reference for time on the dole.

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