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Guides to Contracting through an Umbrella Company

The ultimate guide to contracting through an umbrella company. Everything you need to know to ensure your journey is plain sailing.

When first starting out many contractors decide to operate by employing the services of an umbrella company because for whatever reason they are not yet ready to commit to limited company ownership. This is usually because the contract is less than three months or their annual turnover is £25,000 or less.

To find out more about contracting through an umbrella company we have created our contractor’s guide to umbrella companies, which is designed to provide all the information you need to know about working as a contractor through an umbrella company.

What is an umbrella company?

Umbrella companies essentially act as employers for contractors working in fixed term contracts. They will take care of the bookkeeping aspects that come with contracting as they will collect your earnings from your client, before deducting Income Tax, National Insurance contributions and their margin, before paying the remaining sum onto you. Contracting through an umbrella company may feel a little bit like being a full time employee again, but the benefit of having your bookkeeping and accounting responsibilities taken care of for you is why many contractors choose this option, especially when they are first starting out as a contractor.

How does an umbrella company work?

The process of using an umbrella company can seem confusing to those who have never worked in this way before. Umbrella companies usually have agreements with recruitment agencies, so if you find your contract through an agency you may have no choice in which umbrella company you can use. It is also possible to contract without using a recruitment agency, by dealing directly with the umbrella company yourself.

We have listed below the process of how umbrella companies work, which includes the way in which umbrella companies and recruitment agencies work together:

  • Complete the recruitment agency’s timesheet containing the number of hours or days that you have worked. This timesheet is then signed by your client (the company you are contracting for)
  • Send the completed timesheet to your agency and to the umbrella company (some umbrella companies have online systems in which to do this), along with any expense claims that you may have
  • The umbrella company will then raise an invoice to the recruitment agency for the time that you have worked and for any expenses that the client has agreed to reimburse
  • The recruitment agency will then invoice the client for the hours worked and expense claims if applicable
  • The client will then pay the agency
  • The agency will then pay the umbrella company
  • The umbrella company will then process the amount and deduct tax, national insurance contributions and their fee. The umbrella company will then pay your income onto you in the same way as an employer would pay their employees

Learn more in our guide to how umbrella companies work.

How much could I take home whilst working through an umbrella company?

Contracting through an umbrella company is the most expensive way to operate because you will be subjected to full tax and national insurance in the same way that a full time employee would be. Umbrella companies take care of all your accounting and bookkeeping responsibilities and for this they charge a fee which is deducted from your income.

For more information on the amount that you could be taking home as an umbrella company contractor, take a look at our limited company and umbrella company take home pay page. To get an estimate on how much you could take home as an umbrella company employee, take a look at our Take Home Pay Calculator.

Umbrella company expenses

As an umbrella company contractor you may be entitled to claim some of your business costs (such as business travel) as business expenses. Be aware that some umbrella companies will assume that your expenses are a certain amount (for example £30 per day) when calculating you potential take home pay in order to make your take home pay amount appear higher than it would be if you were using another umbrella company.

However, it is important to keep in mind that all umbrella companies are governed by HMRC and so your take home pay cannot be higher with one company that another, the only difference will be in the amount that the umbrella company takes as their fee. Another point to be mindful of is that if HMRC decide to investigate your circumstances, it will be you that is accountable, not the umbrella company if there are any discrepancies. Therefore, you must ensure that all your expense claims are legitimate and that you retain copies of the receipt for any expenses that you claim.

For more information, take a look at our guide to umbrella company expenses.

Starting out as a contractor

If you are considering making the move from permanent employment to contracting, then deciding on the best way to operate can seem a daunting prospect. Umbrella companies are generally most suitable for those who earn less than £25,000 annually, are only planning on contracting for a short period of time, or are new to contracting and for the time being prefer to let someone else take care of their bookkeeping.

You may find our limited company or umbrella company and advantages and disadvantages of a limited company pages useful when deciding on the best route for you.

Choosing an umbrella company

When choosing an umbrella company, bear in mind that all umbrella companies are overseen by HMRC and so your take home pay cannot be higher with one company than another. The only difference is the amount that each company charges as their fee, therefore any umbrella company that is claiming to increase your take home pay over other companies is making a false claim.

Other factors that you may want to consider when choosing an umbrella company are how they handle enquiries, do they guarantee their service levels and will you be assigned you own dedicated member of staff that is familiar with your situation?

For more information on deciding on the best umbrella company for you, take a look at our guide on how to choose an umbrella company.

Ask our Best Advice Team

For more information and advice on choosing the right option for you, complete the form below and one of our Best Advice Team will call you to discuss your unique requirements. Our expert accountants are also on hand to offer all of the advice and support you need over the phone, call 01253 362 062.

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