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  • Writer's pictureUmbrella Search

Is it worth using an umbrella company?

The umbrella company route has become an increasingly popular option through recent years, with thousands of contractors choosing to work this way. So you may be wondering if this is the right way for you to contract.

After all, umbrella companies promise contractors a wide range of benefits, but are they really worth the hype?

In this guide, Umbrella Search takes a look at what an umbrella company is, how they work and the benefits they offer, so you can decide whether this is the right route for you.

What is an umbrella company?

We'll start by outlining what an umbrella company is.

An umbrella company acts as an intermediary between the contractor and client. The umbrella company takes care of a range of tasks and responsibilities that would otherwise be left up to the contractor, such as invoicing the client, ensuring correct levels of insurance are in place, dealing with admin and paperwork and submitting expenses.

In order to do this, the umbrella company employs the contractor. This in turn means that they pay the contractor a salary, deduct tax and national insurance and provide statutory rights.

That's how an umbrella company works, so lets take a look at whether it is worth a contractor's time to use one.

Benefit from becoming an employee of your chosen provider

Many contractors wonder whether it is the best decision to become an employee, rather than go it alone and set up their own limited company.

So, when making your decisions it's important to weigh up the pros and cons of both.

Let's start by looking at the benefits of becoming an employee of an umbrella company.

When a contractor becomes employed by the umbrella company, they become eligible for a number of benefits. Firstly, this includes receiving a salary. This means a greater level of security and a regular and reliable pay cheque. Limited company contractors, on the other hand, often have to wait until the contract has come to an end or for agreed periods to receive their pay, which can lead to issues with cashflow.

What's more, the umbrella company will ensure that the correct levels of national insurance and tax are taken off your salary, which is in line with pay-as-you-earn tax bands. This means that the contractor is always up to date with their tax affairs and won't need to fill out a self-assessment for their income, which can be time-consuming and complex.

What is an umbrella company?

Limited company contractors, on the other hand, are responsible for their own tax affairs. These contractors must fill out a self-assessment outlining all their income and expenditure throughout the year, and then ensure that they reserve enough of their income in order to pay their tax bill. You can read more about what expenses umbrella company contractors can claim here.

Not only are taxes and finances easier with an umbrella company, they also offer the benefit of statutory rights.

As an employee, this means that contractors can claim statutory sick pay, holiday leave, and things like maternity and paternity leave where applicable. So, should you want to take a holiday, you will receive a minimum of 5.6 weeks of paid leave a year, or if you fall ill and cannot work, you will be eligible for statutory sick leave.

Limited company contractors, on the other hand, do not receive statutory benefits as they are self-employed. Should a limited company contractor want to take time off for any reason, they will not be paid in their absence.

Forget about IR35

Another consideration and worry that many contractors have is IR35. As a contractor, you will likely have heard about IR35, which was introduced as a means of stopping self-employed works such as contractors from claiming to be self-employed for tax purposes, but operating more like an employee.

IR35 is complex, and should you get caught out you can face lengthy, stressful and costly investigations.

One reason that many contractors therefore choose to work with an umbrella company is that it completely removes any worries over IR35. As the umbrella company is the contractor's employer, this means that the contractor is exempt from the legislation, giving you one less thing to worry about.

Let them take care of the hard work for you

As well as offering the contractor employee benefits and exemption from IR35, an umbrella company will also take care of tasks that are part and parcel of contracting.

For example, the umbrella company will ensure that the contractor has the correct insurance cover. This includes compulsory cover such as professional indemnity insurance and public liability insurance, as well as any other types you need to carry out the contract.

The umbrella company will also take care of expenses. The contractor merely needs to to inform the umbrella company of expenses incurred, and the umbrella company will submit these and ensure they are treated correctly when it comes to tax deductible expenses.

What's more, they will invoice the client directly on your behalf. Rather than the contractor having to wait to be paid by the client, the umbrella company will pay you each month meaning no worries about late payments and cash flow.

They will also deal with paperwork and any admin that occurs throughout the contact, taking one more task off your plate.

Is an umbrella company worth it?

Having read our guide, you now know the many benefits of using an umbrella company, and may well agree that it is worth using an umbrella company in 2024.

If that's the case, the next step is to find an umbrella company, which is where Umbrella Search can help.

Our team of professionals will work closely with you to find out more about your circumstances and preferences when it comes to what you need out of an umbrella company, in order to do our research in order to find you the perfect umbrella company.

Ready to take the first steps to finding the best umbrella company? Get in touch today.

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