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Your ultimate guide to working through an umbrella company

An umbrella company employs contractors and freelancers. It’s understandable that the idea of working through an umbrella company as someone who wants to leave permanent employment and work for themself might sound bizarre, but this approach can provide both flexibility and freedom without onerous administration.

However, no one solution fits all. Some contractors are passionate visionaries with a long held desire to make their mark on the world. For them, independence is the name of the game and anything that may appear to be incompatible with that entrepreneurial dream will not fit into their plan. In this case a Limited Company solution may be the preferred route. But there are thousands of other contractors and freelancers in the UK that are simply looking for a better work life balance. They just want to focus on their assignment and don’t want to be worried with the paperwork.

This is why the umbrella company option appeals to both first-time contractors and those with years of experience behind them. If you are working on a UK government contract, you will have no choice but to work through an umbrella company.

Why use an umbrella company

First introduced to the UK in 1999, an umbrella company acts as an intermediary between the contractor and their recruitment agency. You signup as an employee of the umbrella company and will carry out a number of temporary assignments. This is done without the need to manage your own company and payroll. Find out more about how it works here.

Working through an umbrella company structure provides a number of advantages for both the contractor and the recruitment agency. As an employee, the contractor benefits from having their tax and NI contributions calculated and paid over to HMRC on their behalf. They also don’t have to worry about the additional administration often associated with running their own company or being self-employed, such as self-assessment tax returns, processing timesheets or chasing payments from the agency.

Other benefits of working as an employee of an umbrella company include:

  • One tax code for all assignments as the contractor has only one employer.
  • Flexible working conditions as the contractor can accept different assignments and work in different locations whilst still remaining employed by one organisation.
  • Entitlement to many employee benefits such as statutory sick pay, holiday pay and maternity/paternity pay.
  • The ability to claim tax relief on legitimate expenses.
umbrella company

What are your other options as a contractor?

When it comes to choosing which trading structure is best for you as a contractor, there are a number of factors to take into consideration and it isn’t always just about which one offers the best return. In fact, personal preferences and lifestyle practicalities, such as the degree of control and level of responsibility you wish to take on often prove more critical to the decision process than purely financial or business related aspects.

At Umbrella Exchange we appreciate that contractors operate in a variety of sectors and are motivated by very differing needs and circumstances. One size doesn’t fit all but luckily we can help you consider all of your options in detail.

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Umbrella vs limited company

If you aren’t engaged on a government contract then you have a choice on how you structure your contracting; using an umbrella company or setting up your own limited company. Both choices are well established methods and have their associated pros and cons.

The key differences between the two approaches come down to your earning potential and the degree of control and responsibility you are willing to take on board.

With a limited company structure the contractor is responsible for all legal obligations and management of their own company. This includes running a payroll and calculating and paying the correct tax to the UK authorities. However, by being a director and owner of the company, you are able to take decisions relating to when and how you are paid and often benefit from a combination of salary and dividends. This can allow you to manage your tax more favourably and it is for this reason that the limited company option is regarded as the most tax-efficient way to operate as a high-earning contractor.

By contrast, if you join an umbrella company, you’ll be the umbrella’s employee and subject to full PAYE and NIC deductions. The umbrella is responsible for invoicing as well as chasing payments from agencies. Offsetting expenses against earnings will not be as generous as you would get through owning and running your own limited company as umbrella companies are subject to strict rules governing the payment of expenses.

View our detailed comparison of umbrella vs limited company options. If you are still undecided why not get a free umbrella or limited company income comparison from us.

Umbrella vs agency PAYE

Hang on! Didn’t you say contractors are paid via PAYE if they are employed through an umbrella company? We did, but this doesn’t mean it’s the same as Agency PAYE. On paper the options may appear similar but there are a few key differences to be aware of.

For instance the umbrella company will employ you under an overarching contract of employment. This allows you to carry out multiple assignments and find work through a variety of recruitment agencies but remain employed under the same contract. Providing you are not subject to supervision, direction or control, you will also be able to deduct certain expenses such as travel and subsistence costs which could mean an increase in take home pay.

View our detailed umbrella PAYE vs Agency PAYE comparison chart. Or if you’d prefer to discuss your different payment options, talk to us for more information and guidance.

Switching umbrella company

Already contracting but unhappy with your current umbrella company provider? Don’t worry, you can choose to change your provider at any time.

The most common reason for wanting to switch umbrella company comes down to the amount of fees charged and contractors wishing to get more for their money. However, service levels and taking advantage of a new contact can also play a part. With hundreds of umbrella companies operating throughout the UK it pays to know the market and find a provider that’s right for you.

Whatever the reason for the switch, the first step for the contractor will be to get in touch with their umbrella company giving formal notice of their intention to leave. As long as any terms and conditions of the contract are not compromised, the contractor should then expect to receive a P45. From there they are free to join a new umbrella company and the sign up process can usually be done in less than 24 hours.

All the umbrella company providers we work with will assist you with the transition process to ensure you are up and running (and ready to start billing) as quickly as possible in order to avoid any breaks to your payment cycle.

If you’re thinking about changing umbrella company provider or have any other questions about umbrella employment, get in touch or request a free personal report, which will help you consider your best option.

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Further reading:

Insurance - Umbrella Exchange

What kind of insurance do you need as a contractor?

Umbrella - Umbrella Exchange

Find out more about how umbrella companies work

Market Report - Umbrella Exchange

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