If you’ve secured your first contract and your recruitment agency suggests you find an umbrella company, or you’re considering leaving your permanent role for a contract so you’ve begun to research umbrella companies, you might be wondering what an umbrella company actually is. It’s normal to be confused – the majority of people only encounter umbrella companies if they’re in a contract.
In its most basic form, an umbrella company is a body which processes a PAYE payroll for contractors, offsetting business expenses against their tax without having to worry about IR35 legislation.
Umbrella companies act as an employer to contractors who are in a contracted assignment, typically through a recruitment agency. They serve as an intermediary between the contractor and their client (either an employer or an agency), with their principal responsibility being to organise payment for your work.
The Difference between Limited and Umbrella Companies
The prime difference between operating via your own limited company and under an umbrella company is your employment status. The former means that you become a director, and are eligible for a variety of advantages which minimise your exposure to tax – if you’re willing to take full responsibility for your financial affairs. Working beneath an umbrella, on the other hand, you are classified as an employee, and must make PAYE and National Insurance contributions. The benefit of higher tax and NIC liability is that you retain the flexibility of setting your own working conditions, but avoid the bulk of the paperwork and back-office administration.
The Mechanics
The mechanics of umbrella company employment are simple to understand. After agreeing the contract, you will be required to keep a timesheet, usually countersigned by your client. You will need to forward this to the umbrella company, who use it to invoice the client. When the payment is settled, it will be forwarded to you via the umbrella company, minus their fees and any tax or NI payable on it. A payslip will also be enclosed, detailing how your pay has been calculated.
The Advantages
At first glance, this notion may seem incompatible with the self-employment incentive which is often the catalyst for embarking on a contracting career. However, umbrellas offer an important niche in the contracting market, and the dedicated solo artist should be aware of the services they can offer. Instead of seeing them as a half-hearted approach to contracting which sacrifices many of the advantages of an independent career and requires an unnecessary bite out of your earnings, take the time to look at the many benefits of using an umbrella company.
Who Uses Umbrella Companies?
Umbrella companies are used by many high earning contractors, to allow them to make the best use of their time. Accountants, architects, solicitors and HR professionals, amongst others, often use umbrella companies such as Network One. It is estimated that 14% of the UK’s professional contractors currently manage their business through an umbrella company, contributing £82bn to UK GDP across the manufacturing and service industry sectors of the economy.
If you would like to leave your admin, payroll tasks and invoicing to someone else, and devote your precious time to the things you’re actually good at, maybe it’s time that you considered using an umbrella company too. 200,000 people in the UK are paid through umbrella companies, and this figure is set to increase exponentially as more and more individuals enter the freelance workforce, either through career choice or redundancy. In today’s economy, going freelance with the help of an umbrella company might be the best financial decision you ever make.
In its most basic form, an umbrella company is a body which processes a PAYE payroll for contractors, offsetting business expenses against their tax without having to worry about IR35 legislation.
Umbrella companies act as an employer to contractors who are in a contracted assignment, typically through a recruitment agency. They serve as an intermediary between the contractor and their client (either an employer or an agency), with their principal responsibility being to organise payment for your work.
The Difference between Limited and Umbrella Companies
The prime difference between operating via your own limited company and under an umbrella company is your employment status. The former means that you become a director, and are eligible for a variety of advantages which minimise your exposure to tax – if you’re willing to take full responsibility for your financial affairs. Working beneath an umbrella, on the other hand, you are classified as an employee, and must make PAYE and National Insurance contributions. The benefit of higher tax and NIC liability is that you retain the flexibility of setting your own working conditions, but avoid the bulk of the paperwork and back-office administration.
The Mechanics
The mechanics of umbrella company employment are simple to understand. After agreeing the contract, you will be required to keep a timesheet, usually countersigned by your client. You will need to forward this to the umbrella company, who use it to invoice the client. When the payment is settled, it will be forwarded to you via the umbrella company, minus their fees and any tax or NI payable on it. A payslip will also be enclosed, detailing how your pay has been calculated.
The Advantages
At first glance, this notion may seem incompatible with the self-employment incentive which is often the catalyst for embarking on a contracting career. However, umbrellas offer an important niche in the contracting market, and the dedicated solo artist should be aware of the services they can offer. Instead of seeing them as a half-hearted approach to contracting which sacrifices many of the advantages of an independent career and requires an unnecessary bite out of your earnings, take the time to look at the many benefits of using an umbrella company.
Who Uses Umbrella Companies?
Umbrella companies are used by many high earning contractors, to allow them to make the best use of their time. Accountants, architects, solicitors and HR professionals, amongst others, often use umbrella companies such as Network One. It is estimated that 14% of the UK’s professional contractors currently manage their business through an umbrella company, contributing £82bn to UK GDP across the manufacturing and service industry sectors of the economy.
If you would like to leave your admin, payroll tasks and invoicing to someone else, and devote your precious time to the things you’re actually good at, maybe it’s time that you considered using an umbrella company too. 200,000 people in the UK are paid through umbrella companies, and this figure is set to increase exponentially as more and more individuals enter the freelance workforce, either through career choice or redundancy. In today’s economy, going freelance with the help of an umbrella company might be the best financial decision you ever make.