What is an Umbrella Company?
An umbrella is a separate legal entity that acts as an employer for freelance and contract workers. If a contractor chooses to go down the route of having an umbrella company administer their contract they will be paid directly by the umbrella company. They will therefore need to send timesheets to the umbrella company as well as the recruitment agency. The recruitment agency will invoice the client directly.
Should I use an Umbrella Company?
- Umbrella companies should mean less hassle for the contractor. There is no need to set up a limited company as you will be paid PAYE by the umbrella company through a payroll.
- Umbrella companies are cost effective if you are only contracting for a short period of time. They also make sense for freelance workers who are earning less than £15 per hour.
- They can be easier if you need a quick start and are not experienced with contracting. This is no need to set up a limited company or register for taxes etc.
- You are able to claim for expenses incurred through an umbrella company
Disadvantages of using an Umbrella Company
- Generally speaking, if you are on a day rate a contracting with a limited company will be more tax efficient than an umbrella company. Umbrella companies pay freelance workers through PAYE so you should receive the same as a PAYE worker less the umbrella company’s fees.
- You will need to wait longer to get paid as your wages will have to move from the client to the recruitment agency to the umbrella company who will pay you.
- We have come across staff at umbrella companies who do not properly understand how to run a payroll resulting in issues with wages
- It is important to check the credentials of your umbrella company as if your taxes aren’t paid then it is likely HMRC will pursue you for money due.
- Make sure to keep receipts if you are claiming expenses. Some umbrella companies may say that you do not need to keep receipts but HMRC require that you do.
If you plan to remain contracting for a significant period of time and will be earning a good day rate, we would recommend to have your accountant set up a limited company for you. See our contractor accounting services page for more information.