If you have a freelance or contracting company, you may have run into what is known as an umbrella company. Recruitment agencies work with umbrella companies regularly so if you find a position through a recruitment agency, then you may be automatically signed up to work with an umbrella company partner. Umbrella companies are vehicles that help to avoid the administration tasks that are typically associated with freelance or contract jobs. These tasks can include issuing invoices and receiving payments. So, the umbrella company works as a middleman between freelancers and clients to handle necessary paperwork, which makes things a bit simpler for the freelancer or contractor.
Instead of simply setting up a company and selling services themselves, freelancers will work for umbrella companies and these companies take care of PAYE as well as National Insurance and taxes. The umbrella company provides the freelancer with a contract that allows them to work in various positions with different clients, typically all within the same umbrella company.
Working for an umbrella company offers many benefits to contractors, not the least of which is convenience. Instead of taking care of PAYE, National Insurance and other expenses, the umbrella company does all of this, providing a bit of ease for the contractor. Invoices to clients are also typically done by the umbrella company so in essence, it is like the contractor is working a traditional job, with no worries of invoices or chasing payments.
Many in the business world recommend umbrella companies to freelancers and contractors because they offer security with regards to employment along with flexibility that allows the contractor to choose whether or not they want to accept certain contracts. However, even with the benefits that come along with working for an umbrella company, contractors should note that this is not always a cost efficient way to conduct freelancing business.
Umbrella companies charge fees for using their services. Contractors may also be required to pay the costs of processing National Insurance. In some cases. Contractors take home only about 65 percent of the rate that is advertised for a specific job. This makes it essential for contractors to weigh carefully the ins and outs of working with an umbrella company. If loss of actual income related to a job is something that can be overlooked, then the benefits of less paperwork and less worry of chasing payments may be a good fit. If however, losing up to 35 percent of an advertised contracting rate does not sound appealing enough to offset the benefits, then this is something that contractors should avoid.
Some contractors find that setting up a private limited company is a much better option. It allows for a more tax efficient way to run a contracting business and allows for more income to be kept by the contractor. Contractors who set up limited companies can also claim VAT for certain expenses such as company equipment and tools, travel and clothing. Working as a contractor means paying for these things yourself.