What are the benefits of using an Umbrella Company when contracting?

If you’re just starting out in the world of contracting and considering your options when it comes to Limited Company vs Umbrella, you may be wondering what an Umbrella Company even is.

In this blog we explore the benefits of using an Umbrella Company, and how it can benefit you.

What is an Umbrella Company?

An Umbrella Company is a company which provides an overarching contract between yourself (the contractor) and the client / end hirer. The Umbrella Company handles all of your administrative tasks such as paying tax correctly and on time, National Insurance Contributions (NICs), other deductions by law and payroll, and ensures all your tax owed to HMRC is correct and paid on time. The Umbrella Company will invoice your client on your behalf, then pay you once PAYE costs and their fee has been deducted. When you enlist the services of an Umbrella Company you effectively become their employee.

Employee benefits

When you use an umbrella your wages will be paid via PAYE, meaning that you also get all the benefits of being employed, which include maternity and paternity pay, sickness and holiday pay and pension contributions.

Pensions

Since the introduction of the Pension Auto Enrolment Scheme in 2012, every employee aged over 22 that earns more than £10,000 per year within the UK will automatically be enrolled into the scheme. As an employee of an Umbrella Company you’ll also be auto enrolled, and will have to opt-out if you don’t wish to use it. You also have the option to continue to pay into your private pension, which here at SG Umbrella we don’t charge you extra for.

IR35 stress-free

IR35 is a piece of tax legislation designed to identify those who claim to be self-employed (and therefore have access to the tax benefits which are only available to those who are truly self-employed) who are in fact employed, and therefore not entitled to the same benefits. When you contract using a Limited Company your IR35 status is determined by the client / end hirer, so the decision is completely out of your hands. This is one reason why a lot of end clients decide not to work with Limited Company contractors, as they’re concerned that if they get someone’s status wrong, they’ll be financially liable for their tax and any fines due. By using an Umbrella Company you’re eliminating this risk, and therefore may seem more attractive to end hirers / clients.

When using an Umbrella Company you’re paying your tax and National Insurance through PAYE, which is deducted before you even get paid (similar to how you might’ve been paid when in permanent employment) and so you don’t need to worry about your IR35 status.

Minimal management

When you become an employee of an Umbrella Company you pay a weekly or monthly fee, which covers all your management. This will typically include the following:

• Handling and processing your PAYE
• Liaising with your end hirer / client to ensure you’re paid, and that it’s the correct amount
• Providing employee rights
• Providing financial advice and support (unlike SG Umbrella, not all do)
• Pay into your pension (with SG you can pay into your preferred private pension at no extra cost)

You’ll also receive your payslip, which will show your tax deductions, pension payments, and the umbrella’s management fee. Your wage will then be paid directly into your bank account. It’s as simple as that!

New to contracting?

If you’re just starting out or don’t want the commitment of forming your own Limited Company, then using an Umbrella Company can be the perfect option for you. If you’re between permanent jobs, have shorter contracts, are testing the waters, or simply just want to try something new without leaving the safety net that comes with being an employee, then umbrella contracting could be the perfect solution for your current situation.

How SG Umbrella can help

If you’re new to the world of contracting and are considering an Umbrella Company, we can help. Run by experienced contractor accountants, and backed by the FCSA (Freelancer & Contractor Services Association), we can advise you on setup and help you make the most tax efficient decisions. Get in touch today to find out more about SG Umbrella.