An essential service for a wide range of contracting professionals, umbrella companies can open up a variety of options to help optimise how your business is run. However, knowing which option is right for you can prove extremely difficult – impacting on your ability to save time, resource, and effort.
So, what exactly is an umbrella company and how can your business potentially benefit from deploying one?
What is an Umbrella Company?
Operating under PAYE rules, umbrella companies are created to help contractors who work on short term or temporary assignments. Operated by a third party, this entity acts as an employer for the contractor it is attached to, as consolidated through a contract between the company and the entity contracting an individual’s services.
The company is then used as an administrator for any work carried out by its employees, including invoicing, timekeeping, and paying out a regular salary for its employers.
In practice, this involves you creating an umbrella company and performing work for your client. Once the work is complete, the client generates an invoice that is paid directly to the umbrella company. The company than pays out any due tax or social benefits to relevant bodies and pays out a set salary to its registered employees – in this case you.
Choosing to deploy a company allows you to claim back the cost of business expenses and carries a number of benefits. And despite forthcoming changes to IR35, working through an umbrella company is the most effective way for many contractors and providers to carry out work and manage key finances.
When can you make use of an umbrella company?
Any contractor can potentially set up an umbrella company. However, doing it the right way involves a large amount of consideration and due care. Here are some pointers…
Short Term Contractors:
Umbrella companies are exceptionally useful for contractors operating on a short-term basis. Setting up an umbrella company allows you to circumvent the inconvenience of establishing a full, limited company and isolates professionals from the daily administration involved in dealing with accounts, payroll, and taxation. For short term contractors, a main advantage is not having the costly process of forming a company. This also allows short term contractors to avoid the time-consuming process of establishing and dissolving a company.
As an independent freelancer, the HMRC allows you to claim certain expenses, which are either a direct reimbursement of your costs by your agency/ client or a cost to you that will be offset by your gross earnings thereby reducing your tax and NI liability. Your umbrella company will process your freelancer expenses for you. As with contractors, freelancers can draw considerable benefits from using an umbrella company. However, it is important to cover a number of key areas before using one. At a minimum, this should involve looking at whether the entity is fully tax compliant, how quickly it can undertake payment processing, and if it follows a set expenses model for carrying out claims.
The main benefit of using an umbrella company is that it removes the hassle associated with setting up and running your own limited company. Depending on your needs, it can be worth considering making the switch to an umbrella company. While limited companies allow you to operate as the head of the company and enjoy more flexibility over how you manage your income, umbrella companies can help strip away the admin involved with a limited company and help make dealing with you hassle-free.
One of the key benefits for sole traders is that umbrella companies provide dedicated public liability and professional liability insurance, allowing you to remain insulated from harm in the event of an incident. This also allows you to draw down benefits such as statutory sick pay, maternity and paternity pay, and other key elements – helping you keep your operations clean and quick while providing extra help that you would otherwise miss out on.
Ultimately, no matter what route you choose, it is vitally important to fully review your potential provider before deciding to make a significant change to your business setup.
This should also involve taking a look at the practice of setting up the company to confirm that there are no significant hidden fees involved and that the provider is fully experienced with a verifiable professional pedigree. Remember – as a professional, time is your most valuable resource. Correcting issues or spending time addressing ongoing problems is time you could spend earning or chasing up your next contract.
If you want to learn more about how umbrella companies can potentially help your business, our team at One Click Group is here to help.
With many years’ professional experience, we work with you to provide the professional advice and support that your company needs. Contact Us today if you have any more questions.
Along with over 13 years experience in the contractor payroll industry, and after spending most of his working life as a financial advisor in the regulated financial services industry, Mike has garnered an extensive network of contacts in the recruitment industry, many of whom trust both him and the One Click Group to handle their accounting. Mike has also been a member of various industry bodies throughout the years, such as the British Institute of Recruiters, in order to champion best practices across the contractor payroll industry.