A Contractor’s Guide to Using an Umbrella Company

28.03.22

When you’re really good at a trade or profession, you could be the person companies turn to when they require skills outside of their normal line of work in order to get once-off (or as-needed) projects done. As a contractor, you’re an independent operative rather than an employee. But while this might sound nice, it comes with a lot of baggage you might not have been prepared for. 

Choosing an umbrella company could be the solution, but what is an umbrella company? In this article, the umbrella company is explained and we look at the practicalities to more fully answer the question: “What is an umbrella company for a contractor?” The answers to these questions will help you to decide whether you want to join one or whether you feel equal to going it alone. 

What is an Umbrella Company in the UK?

Since it is so wet in the UK…  kidding! As you’ll have guessed, the umbrella company meaning has nothing to do with keeping you dry on rainy days. But it can save you from getting tied up in red tape and admin work that’s outside of your core skills and takes time away from doing what you do best.

So, what’s an umbrella company definition? In simple terms, it’s a company that independent contractors can join instead of facing the complications that come with starting their own limited company. But it does far more than just act as a legal entity from which operations can be based. 

A good umbrella company will ensure that tax obligations are met, and will help with the necessary insurance that allows you peace of mind. It also invoices your clients and ensures that you get paid. More on this shortly.

Why Use an Umbrella Company?

As an independent contractor, admin, accounting, managing the ins and outs of insurance, and debt collection are certainly not what you were planning to do when you first set out. Doing all this work yourself takes hours out of your productive time, and unless you’re a real all-rounder, keeping up with all of this not only causes stress and frustration, but also takes time for you to master. 

With an umbrella company, you don’t have to become a financial manager and accountant in your own right. In legal terms, you’re an “employee,” although we prefer to refer to our contractors as “clients.” As such, everything is taken care of by a team of experienced professionals, allowing you to get on with what you’re best at.

That means that you can dispense with worries such as finding yourself with a big tax liability and insufficient cash flow to cover it. We deduct taxes as you go in the form of PAYE, saving you from having to keep track of how much you’ll owe and should budget for tax season.

Umbrella company membership could even help you to stand a better chance of contracts being awarded. It appeals to public bodies and recruiters seeking contractors. They don’t need to assess IR35 since it doesn’t apply to you. You’re paying PAYE tax, and they know that your insurance will be in order. Needless to say, it saves them a lot of work as well as any risks they face if mistakes are made. 

But making financial management easier for you and your clients isn’t all we do. Since we have a long-standing reputation with firms that regularly offer contract projects and with contracting agencies, you get seen as a familiar face. It’s like working for an established company while still doing your own thing. Needless to say, it also improves your chances of being awarded contracts.

Being a lone contractor can be frustrating. Late payments are a headache and sometimes, clients don’t treat contractors as they should in other contexts. Once again, our umbrella company steps into the breach. We follow up on issues that would otherwise be up to you to handle, and you get the benefits of having a powerful business to back you up.

On the subject of benefits, you’re also entitled to all the employment rights stipulated by law including paid leave based on the hours you’ve worked. 

Umbrella Company Pros and Cons

As we’ve already seen, it’s easy to work as a contractor under an umbrella company. It’s the biggest reason why people choose Evolve CS.  When they get paid, they know that all obligations are covered, and they can relax and enjoy the fruits of their labour. When they need professional office support, it’s right there for them and they only need to get in touch. 

However, everything comes at a price. If you’re working on longer-term contracts, you may find that you get tax advantages from operating as a limited company. However, if you’re generally working on shorter contracts or don’t want the hassle and responsibility of operating a company of your own, the umbrella company is the perfect solution. 

Umbrella companies also help you to avoid unexpected tax liability disasters. If you’re working through agencies, you can easily end up with multiple tax codes to manage, and you might end up being liable for emergency taxes you weren’t expecting. With our umbrella company, you only have one tax code and there are no unpleasant surprises. 

In some cases, contractors who own limited companies still use umbrella companies for certain contracts, thereby getting the best of both options. Sometimes, they work independently while they prefer handling certain types of contracts under an umbrella.

Some sources note that your umbrella company costs and taxes will be higher than if you handled them yourself, but the time savings of not having to do your own admin and accounting also allow you to spend more time on the job. That means more time spent earning money and no time spent trying to navigate the minutiae of tax, insurance, and so on. It’s also worth remembering that you’re entitled to paid leave, and if you don’t take it, we have to pay out outstanding leave when your contract with us ends. 

Umbrella Company: What’s my Net Take Home Pay?

If you’re working under an umbrella company, it collects payments on your behalf, deducts tax, insurance, and its fee, and you get the rest plus employee benefits. You submit time sheets and records of expenses, and when you’re paid, you receive a payslip detailing your earnings and deductions. 

The simplicity, transparency, and predictability of this model appeals strongly to many contractors and Evolve CS will be happy to present you with any information you may need in order to decide what’s best for you. 

On top of that, you won’t find yourself having to do without the standard employee benefits that so many independent business owners miss out on. 

Still not sure if joining an umbrella company is right for you? Talk to us today. It may be the best step you ever took.

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