When venturing into your contracting career, one of the first things you’ll need to consider is whether you want to contract as a Limited Company, or through an Umbrella company. But what actually is an Umbrella company and how do you choose one that’s right for you?

In this blog we explore just that, and why using an Umbrella company may be the best option for you.

What is an Umbrella company?

An Umbrella is effectively a PAYE payroll provider (agency) for contractors and freelancers which creates an overarching contract between yourself and the end client. The Umbrella company deals with all of your tax, payments and invoicing, just as your employer would if you were a permanent employee.

How do you get paid?

The client will pay your Umbrella, and then the Umbrella will deduct a fee for their services, along with income tax, PAYE and National Insurance. You will then get paid a final amount, just as you would as a permanent employee. It’s an incredibly simple way of being paid and ensuring you’re paying all the correct taxes due.

IR35 and using an Umbrella company

As a new contractor you may have heard of the tax legislation IR35, and the implications if you get your status wrong. When contracting through an Umbrella, you don’t need to worry about being found ‘inside’ IR35, as you’re already paying National Insurance, income tax and PAYE. In fact, many contractors who are knowingly accepting a contract which places them ‘inside’ IR35 will actively choose to use an Umbrella company for this purpose. Less risk, less hassle, and you know how much you’ll be taking home, without any costly surprises.

When else is a good time to use an Umbrella company?

There’s a few times when using an Umbrella company could benefit you more than being a Limited Company:

If your contract runs for less than three months: Whilst the setup of a Limited Company is easy and quick to do with the right contractor accountant, it does involve more work and will require your attention to manage. If you’re only planning on contracting for a short period, then it might be less hassle for you to use an Umbrella company.

If you’re earning less than £140 per day: It may not be worth being Limited if you’re earning less than £140 per day, as the tax savings won’t justify incorporating a company.

If you’re contract is found ‘inside IR35’: you’ll be treated as a permanent employee and taxed as such, therefore you may as well use an Umbrella company to deal with your tax and PAYE.

How do you get started?

The idea of setting yourself up with an Umbrella company may seem daunting, but in reality it’s very simple. Here we outline the process, and what you need to do to get going:

  1. Register with an Umbrella company – a good Umbrella will have an accountant you can speak to directly, rather than a sales team. They’ll run through the setup process and how they can help you get going
  2. Once you have received, signed and sent back your offer of employment, your Umbrella will contact your agency or end-hirer to inform them of your joining their Umbrella company. Each party will then enter into overarching agreement and will sign a contract agreeing to the terms of the contract and exchange assignment details
  3. Submit your time sheets – whilst contracting you’ll be expected to complete your timesheets. Depending on your arrangement, you’ll then need to send it either to your client or agency for them to sign it off. Once signed your Umbrella company will then know how many hours they need to invoice your agency or end-hirer. You’ll then need to send it to your Umbrella
  4. Your Umbrella will invoice your agency or end-hirer – Once the Umbrella has received the signed timesheet they will then invoice your agency or end hirer. They will then pay the Umbrella
  5. Your Umbrella will deduct tax, PAYE, National Insurance and their fee – once they have done so they will pay you the remaining amount into your bank account. You’ll then receive a payslip to see how many deductions have been made, and what your net salary is

What can SG Umbrella do for you?

SG is an Umbrella company run by expert contractor accountants, and backed by the UK’s leading contractor compliance body. Our package includes everything you’ll need to successfully manage your contracting career, including:

  • Expert service with IR35 and tax advice
  • Fully compliant – FCSA accredited
  • Super fast and accurate payments – get your money faster with SG
  • Unlimited payments into your preferred pension, saving tax and National Insurance plus save more with Employer Contributions
  • Full employment rights – including holiday and sick pay, maternity and paternity pay
  • The ability to switch back and forth from SG Accounting for a Limited Company when needed
  • Annual wealth review

Get in touch now

Speak to one of our expert contractor accountants to find out more information today.