Using an Umbrella Company For an Easy Life

Using an Umbrella Company For an Easy Life

Contractors who have worked under a limited company for years will be surprised to hear that umbrella companies are fast becoming the popular choice for new contractors and freelancers. As many of you will know an umbrella company is a company that is set up to be an intermediary between a contractor / freelancer and the clients they work for. And the main purpose of that umbrella company will be to deal with all of the day to day administration that comes with contracting, (such as taxation, payroll and invoicing) in order to free up more time for the contractor to work their contracts (and therefore make more money.) In return for a small fee (depending on the umbrella company) the client will no longer have to worry about the hassles of PAYE and NIC’s, of invoicing and chasing clients and of dealing with accountants, HMRC or Companies House.

Tell Me Something I Don’t Know – Haven’t Umbrella Companies Been Around Forever?

Absolutely, and this is part of their appeal. They have always been popular with contractors but it is only in the last few years they have become really popular. That’s because HMRC has recently been introducing more and more legislation to close down popular taxation vehicles used by contractors and in all that legislation umbrella companies have remained untouchable. Legislation in 2007 explicitly noted that umbrella companies were considered to be in a different category than composite structures and single person companies and they remain the best solution for avoiding the perils of IR35. Whilst structures such as Managed Service Companies and Employee Benefit Trusts have fallen by the wayside and whilst limited company contractors find themselves more and more wary of any new regulations, umbrella companies keep on growing in popularity (there are now more than 200,000 people in the UK working through an umbrella company) and doing what they do.

So What Is It That They Do?

In a nutshell they offer the only rock-solid, compliant and trustworthy alternative to a limited company on the market, designed to offer contractors a much easier and more relaxed way of working without all the paperwork and admin that comes with running a limited company.

What About The Tax Advantages of Limited Companies?

For contractors who earn more than £300 a day there are some tax advantages to running their business through a limited company but these need to be weighed up with all the disadvantages and regulatory pitfalls that come with being a limited company contractor. For other contractors and for new contractors the tax advantages of a limited company structure are much less and they would almost certainly benefit more from the other advantages (as well as the guaranteed compliance) of an umbrella company.

Tell Me About The Advantages of Umbrella Companies Then…

Firstly, it is worth stating that umbrella companies do have some tax perks of their own. On top of the time and money they will save you in freeing you up from admin and paperwork they also allow you to claim money back in expenses whilst working under an employer / employee structure. For example, as you will most likely be contracting from a number of different locations these will all be classed as ‘temporary workplaces’ and this will mean you can claim for travel and subsistence costs involved with getting to and from those temporary workplaces as well as any costs incurred on site. These expenses can be offset against your gross salary.


Secondly, you will be working through PAYE and NIC’s and will therefore be a full employee of your umbrella company. This means that although you are still a contractor you will be given the full statutory rights of an employee, which include sick pay, sick leave, maternity leave and holidays.


Thirdly, any umbrella company worth its salt will also provide you for free with all of the insurances you are required (or strongly recommended) to get as a contractor. This should include complete cover for both professional and public liability. Standard levels offered by most umbrella companies are up to £5 million for Public Liability Insurance, up to £10 million for Employers Liability Insurance and up to £10 million for Professional Indemnity Insurance. Some will also cover you for insurances specific to your sector of contracting.


Then there is the issue of compliance mentioned above. This is fast becoming one of the biggest advantages of umbrella companies. As mentioned above, the fact that they have been around for years when other company structures have been legislated against by HMRC has meant many contractors have concluded they are the safest port in a storm. The IR35 legislation that looms over the working lives of every contractor is simply not an issue when it comes to working through an umbrella company. Whilst IR35 was introduced with the aim of catching contractors who had an ‘employment’ style relationship despite working outside of PAYE and NIC’s, umbrella company contractors work through PAYE and NIC and are therefore never going to fall foul of IR35. The same thing applies to Managed Service Legislation and Onshore Intermediaries Legislation. In other words, unlike limited company contractors, umbrella company contractors can be certain they will never find HMRC knocking unexpectedly at their doors.

  Ok, That’s All Great, But Will An Umbrella Company Really Mean An End To Paperwork?

Absolutely. That’s the whole raison d’être of an umbrella company. Most contractors and freelancers go solo because they want to work for themselves doing what they love and because they want to flee the tedium and time-wasting of paperwork and admin that comes with an office environment. Many limited company contractors then find themselves spending half their time doing exactly that. Joining an umbrella company is the perfect solution for people who don’t want to do any paperwork whatsoever and want to spend all their time concentrating on their actual contract work. Once you sign up with them, umbrella companies will immediately start handling all of your PAYE and NIC payments and will deal with HMRC on your behalf. Not only that, but they will also handle all of your invoices to clients and then collect the money from those clients when it is time to pay up. This also means they will handle the legal side of things if they need to chase clients for money (one of the worst parts of contracting.) Indeed any paperwork or admin relating to the day-to-day running of your contracting career will be dealt with by your umbrella company. The only thing you will have to do is hand in a timesheet (with your hours and expenses) once a week, normally via an online portal. That’s it. That’s the total extent of your paperwork as a contractor!

Sounds great! Any disadvantages?

Only that for a small percentage of high-earning contractors the tax advantages, as mentioned above, might be slightly better with a limited company. But for everyone else the removal of all the administrative hassles and paperwork make umbrella companies the perfect way of working. This is especially true for new contractors who might want to see if they enjoy the contracting working style or for experienced workers who wish to contract temporarily. Umbrella companies are easy to join and easy to leave in a matter of hours whereas limited companies can take ages to get started and even longer to close down again. Once again that’s down to all the paperwork – limited companies require a ton of it whilst umbrella companies require none.

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