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For contractors thinking about which structure to use, working under an umbrella company is an increasingly popular alternative to becoming a limited company director or operating as a sole trader.
Although many people choose to work through an umbrella company to reduce their administrative burden, they can still seem confusing to those who have never used one before. Our guide is here to help explain how umbrella companies work, the main relationships between clients, agencies, umbrella companies and contractors, and how to find a reputable umbrella company.
An umbrella company is an organisation which employs contractors working on temporary assignments. Once you register, you will become an employee of the company, who will invoice your recruitment agency for the agreed rate and make all statutory deductions of tax and National Insurance on your behalf before paying your earnings to you. You can find out more in our guide to umbrella companies.
When you work under an umbrella company, you can expect it to look a little something like this:
As an employee, you will be covered by your employer’s insurances and your agency may wish to see a copy of this. Because you will not be responsible for paying your own tax, there is no need to set up your own company or register for self-assessment and you will not usually need to employ an accountant.
All compliant umbrella companies will employ you and pay you all of your income through the Pay as You Earn (PAYE) system. You may still be able to benefit from some tax relief on legitimate business expenses; however, these are restricted. This means that you should take home as much of your pay as any other employee, minus the fee you pay to the umbrella company for dealing with the admin.
As a contractor, you may be seeking a simple way to get paid, and an umbrella company reduces the pressure on you to deal with a significant amount of admin work. By opting for employment you can focus on your assignment and reduce the stress associated with working for yourself.
Many contractors have also turned to umbrella companies as an alternative due to the IR35 private sector reforms (now postponed until April 2021). After the reforms, the responsibility for determining IR35 status will fall to the end hirer, and for contractors whose assignment is deemed inside, they will no longer have access to all of the tax benefits associated with running a limited company. You can find more information about the reforms in our blog.
Some umbrella companies claim to offer more than others, and whilst there are variations between the promises they make, some of them will be too good to be true. Common claims that are made by less scrupulous companies include:
It is important to check the credentials of any umbrella company before you enter into an agreement with them. If your tax and National Insurance isn’t paid, you will be pursued for any outstanding amount owed, so you should choose carefully to ensure that you aren’t putting yourself at risk by using a disreputable outfit.
If you’re thinking about working under an umbrella company, you should be wary of any company that promises any of the above. Instead, you should look for a company with a long-standing industry reputation and accreditation.
Parasol, our sister company, have been supporting the industry since 2000. Their commitment to compliance is illustrated through their FCSA accreditation and their part in helping to found APSCo. This dedication to quality and assurance, alongside their industry expertise, means that you will always be in safe hands.
To find out more about working under an umbrella company, visit Parasol directly.