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  • Writer's pictureUmbrella Search

Realities of contracting through an umbrella company

Updated: Nov 14, 2023

Are you a contractor considering operating through an umbrella company in 2023, but aren't quite sure whether it's the best option for you?

In this guide, Umbrella Search spells out the realities of working through an umbrella company to help you decide whether this is the right decision for you.

No IR35 stress

Every contractor will know about IR35 legislation. For self-employed contractors, ensuring IR35 complicity can be stressful and time-consuming, not to mention if you are investigated, you will incur heavy costs.

However, one of the realities of working through an umbrella company is that IR35 is irrelevant. This is because the contractor is employed by the umbrella company, meaning that IR35 does not become an issue, giving you one less thing to stress about.

You will pay Umbrella company fees

The truth is that umbrella companies aren't free to use. However, the good news is that umbrella company fees are very competitive, meaning a low cost in exchange for the range of services and benefits they offer the contractor. In fact, most umbrella companies charge as little as £15-30 per month to the contractor, far less than you would pay if you were a limited company contractor hiring an accountant.

What's more, the umbrella company fee is taken off the contractor's pay before tax is deducted, lessening the amount of tax owed.

Get ready to receive Employee Benefits

When you sign up with an umbrella company they become your employer. One of the many benefits this provides to the contractor is statutory benefits.

This means that umbrella company contractors receive statutory sick pay if they're too ill to work, holiday pay when they wish to take a well-earned break, maternity or paternity pay should they need it, and a workplace pension.

This gives umbrella company contractors a great advantage over self-employed contractors who have to pay out of their own pockets should they need to take time off work.

What is an umbrella company?

Getting continuity of employment

Although umbrella company contractors may work with several different clients and are free to choose when they work and with who, they do in fact have continuity of employment. This is due to the fact that they are employed by the umbrella company who remains their sole employer.

This is unlike contractors who work through a PAYE agency, for example, who aren't entitled to continuity of employment.

This is considered yet another advantage of working through an umbrella company, helping you receive credit for things such as getting a mortgage or securing a loan.

Getting paid by an umbrella company

The realities of getting paid by an umbrella company are incredibly easy.

Typically once a week the contractor will submit their timesheet to the umbrella company, who will then invoice the client on their behalf. If the client doesn't pay on time it is the umbrella company's responsibility to chase this up.

Rather than being paid by the client directly, it is the umbrella company that pays the contractor.

The umbrella company processes the contractor's pay through their payroll before paying the contractor. When processing the contractor's pay, the umbrella company will deduct the correct levels of tax and National Insurance in line with Pay-As-You-Earn tax brackets. This means that the contractor is always tax compliant and up to date with what they owe to HMRC.

This also means that the contractor doesn't have to worry about tricky tax returns like self-employed contractors do.

Less tax efficient

Working through an umbrella company is slightly less tax efficient than operating through a limited company. After all, limited company contractors can take advantage of paying themselves a small salary and then topping this up with dividend payments, which are subject to slightly less tax.

Although this means that the contractor will pay slightly less tax, running a limited company does incur many responsibilities, and there are even a set of director's duties every director must abide by.

What's more, limited company contractors usually end up utilising the services of an accountant in order to take advantage of such tax efficiencies which typically costs them upwards of £120 per month.

Umbrella company contractors pay small fees in comparison and don't have to worry about taxes or mountains of admin and paperwork.

Day to day admin

It is widely regarded that contracting through an umbrella company is one of the most hassle-free ways to contract. This is because there is minimal admin and paperwork, with the umbrella company taking care of such things on the contractor's behalf.

Self-employed contractors working through their own limited contractors have many responsibilities on the other hand, including filing company accounts and tax returns, filing a confirmation statement each year, ensuring correct proceedings are taken when dividends are taken and that this is properly documented, plus much more.

Therefore, umbrella company contractors have more free time on their hands to focus on what's important.

Ready to make the leap to umbrella company?

Now you know about the realities of working through an umbrella company, you may be considering joining the thousands of other contractors across the UK using an umbrella company.

If this is the case, it can be tricky to know where to start. After all, there are tons of umbrella companies out there, so how do you know which is the right one for you?

That's where Umbrella Search can help.

Our experts will get to know you and your contracting needs before carrying out a thorough search and due diligence to find you the best matches out there.

To see how we can help you, and to take the first step towards an umbrella company, get in touch with the Umbrella Search team today.

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