Essentially, an umbrella company provides an alternative legal structure for independent contractors to receive payments from their clients. Instead of setting up a limited company or becoming a client’s direct employee, contractors can become an employee of an umbrella company.
That means the client doesn’t have to offer benefits to the contractor, such as holiday allowance or sick pay, and it means the contractor can earn higher wages. It also means that the contractor will be subject to lower levels of tax.
What does an umbrella company actually do?
The umbrella company acts as an intermediary, handling all payments to the contractor and dealing with all the necessary accounting and tax issues. The contractor can also claim expenses through the umbrella company. This means the contractor will also receive an improved ‘take home’ wage compared to what they would receive if they were a direct employee of the client.
Since the contractor is ‘employed’ by the umbrella company, they also have more employment rights than if they were self-employed, whilst still retaining a level of independence.
Do all contractors use an umbrella company?
No, not all contractors use an umbrella company. To cut out the middleman, many contractors create their own limited company. With an umbrella company, you’ll still have to pay things like National Insurance and you won’t have complete control over your finances.
If you start your own limited company, you’ll also receive a higher level of ‘take home’ pay than you would with an umbrella company. That being said, setting up a limited company is a lot of hard work and some people prefer to opt for the easier option of using an umbrella company.
Benefits of using an umbrella company…
– Financial perks. Contractors can take home a higher income, which is subject to lower levels of tax
– Easy to use. Simply send your invoices, timesheets and expenses to the company. They handle things like calculating your tax and paying National Insurance.
– You won’t get bogged down in the daily administration of setting up your own limited company. Using an umbrella company requires far less paperwork.
– Since contractors are ‘employed’ by the umbrella company, they have more employment rights than if they were self-employed. You can also claim basic expenses too.
Disadvantages of using an umbrella company…
– You won’t have the complete freedom and control that you would have by setting up your own limited company. On paper, you are an employee of the umbrella company.
– It’s another middleman. The company pays the umbrella company, who then distribute the money to you. They might do this on a monthly or weekly basis, so you don’t have the freedom to withdraw your money.
– Umbrella companies charge for their services and you’ll have a smaller tax burden if you set up a limited company.
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