If you are a self-employed contractor, you can operate through a contracting umbrella company instead of burdening yourself in establishing your new private company. The benefits of operating via an umbrella company are based on your IR35 status and contracting period with the company.
This blog will let you know about the importance of working through an umbrella company.
What is a Contracting Umbrella Company?
It is a company chosen by contractors as an alternative to setting up its own limited company. It hires contractors that are working on fixed-term contracts. After joining an umbrella company, it behaves as a mediator between the contractor and their recruitment agency (or end client).
Your umbrella company handles administration, payroll and takes all the responsibility of running your company. First, it invoices and receives money for the task you accomplish. Then, it pays you via PAYE after subtracting all the costs like pension payments, taxes, and NICs from it.
Working Through a Contracting Umbrella Company – Process
The following are the three steps in order to work through it, and these steps are pretty simple.
1) Register with an Umbrella Company
You have to contact your selected umbrella company provider after you are done comparing different providers. Your account setup will be completed within one day by your chosen umbrella company.
2) Sign a Contract
You will have to inform your end clients or recruitment agency, after signing the contract. This is because they will prepare your contracts by utilising the title of the contracting umbrella company (as a contractor).
3) Start an Assignment with Clients
You have to inform your umbrella company when you start an assignment with the end client. For instance, you need to tell them about the start and end dates, rates, and other similar details of the relevant project.
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What are the Benefits and Drawbacks of Working through an Umbrella Company?
Go through these benefits and drawbacks before operating via an umbrella company. First of all, we will see its benefits.
- Reduce administration load – You don’t have to worry about the administration, as an umbrella company handles it. It deals with accountancy, taxation, invoicing, payroll, sending timesheets, and chasing payments on behalf of you.
- Contractor gets rights – You can get holiday pay, workplace pension, paternity pay, statutory pay, and maternity pay as an employee of an umbrella company.
- Useful for short-term contractors – It can be the best option for short-term contractors as they will not have to set up their own company and manage its administration.
Now, we will see its drawbacks.
- You have less control – You control all the finances of your limited company if you establish one. But while operating through an umbrella, you don’t have much control over the administration.
- Unlawful umbrella companies – It is very complex to research a legal umbrella company before signing a contract. Because there are many illegal companies that are working under unlawful arrangements, such as avoiding tax schemes.
- Not very tax-efficient – Umbrella company will pay you in the form of salary after deducting all the costs mentioned above. So, it is not very tax-efficient to work through it.
We will conclude our blog by saying that please review these benefits and drawbacks before working through a contracting umbrella company. The most suitable decision will be based on your situation. It is better to research first, and still, if you are unsure, ask a professional about it.
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Disclaimer: This blog contains general information about umbrella companies.