When is using an Umbrella Company the right option for you?

If you’re new to the world of contracting you may be considering using an Umbrella Company to help get you started, but how do you know if using one is the right path to take, and what are the pros and cons of doing so?

In this blog we explore just that, to help you decide which is the right option for you.

How does an Umbrella Company actually work?

An Umbrella Company creates an overarching contract between themselves and you, the contractor. You effectively become an employee of the Umbrella, and so they take care of your employment admin, including your tax liabilities, and any other requirements you’d expect from a permanent employer.

When you work on a contract your Umbrella Company will invoice your client on your behalf, and collect payment from them. They’ll then pay the tax and National Insurance Contributions due, deduct their fee for acting as your Umbrella, and then pay you the remaining amount as your income. For a more detailed look into how an Umbrella works, take a look at our blog.

What taxes can you expect to pay when using an Umbrella Company?

In the eyes of HMRC, as an ‘employee’ of the Umbrella, you’re considered a permanent UK employee. You will therefore be provided with a tax code, and pay either a basic, higher or additional rate of tax based on your income, exactly as you would if you were in permanent employment.

How much can you expect to take home from your contractor pay?

Your take home pay will be determined by how much you earn and therefore how much you’re taxed, and the fee which your chosen Umbrella Company charges. Umbrellas usually do this in two ways:

Charge a fixed fee – this is usually a flat fixed fee they’ll deduct from your income either on a weekly or monthly basis. Here at SG Umbrella we only charge a monthly fee, take a look to see what you get for your money here.

Charge a percentage fee – the Umbrella takes an agreed percentage from your income. Traditionally this can be around the 5% mark. This might be an option to steer clear of, as when you begin to earn more your Umbrella will take a bigger cut.

Should you use an Umbrella Company?

Using an Umbrella Company can be the best option for the following reasons:

If you’re just starting out – and you’re finding your feet, then having the security of employee rights, plus knowing the right amount of tax is being paid on your behalf from your income may be the perfect option.

If you’re found inside IR35 – contracting under an Umbrella may be your safest option. Take a look at our blog on working inside IR35 and what it’s means for you and your take home pay.

If you’re not going to be earning more than £30,000 pa – for tax purposes it may be more beneficial to use an Umbrella.

If you plan to contract for less than 6 months – the set-up and shut-down of your Limited Company may not be worth the hassle if your income and subsequent tax benefits don’t outweigh the period of time you’re planning to contract for.

If you’re planning on starting a family in the near future – using an Umbrella Company means you’re entitled to employee benefits, such as sickness, holiday, maternity and paternity pay. If you’ll need the security of mat/pat pay, then using an Umbrella may be the best option for you.

How do you know if you’re better off incorporating your own Limited Company?

Every contractor will ask themselves this question at one point in their career, either at the very start, or when they become more established and feel greater confidence in understanding the contracting world. The best thing to do is to speak to an expert contractor accountant who will be able to advise you on your best option, based on your personal and professional circumstances.

Here at SG we offer both Limited and Umbrella services in our monthly fee, and if you decide to go limited you’ll get our Umbrella services for free. We can switch you between our two services, depending on your contract’s requirements, then simply switch you back at the touch of a button.

If you’re looking for some further reading, then our blog on switching between Umbrella and Limited is a good place to start.

What about IR35?

IR35 is a piece of tax legislation introduced by HMRC to identify and stop those who claim to be self-employed in order to claim the tax benefits only available to those who are truly self-employed, when in truth they are employed. If you’re deemed to be found ‘inside IR35’ then you’ll be taxed as such and lose your tax benefits, and if found ‘outside IR35’ you can continue to be taxed as self-employed and enjoy the tax benefits available to you.

If you’re contracting through your Limited Company your end client/ hirer makes the final decision on whether you’re found inside or outside. Take a look at our website for more information on IR35 and how SG can support you.

How do I get started with an Umbrella Company?

Simply click on the following link to register your information with us, and we’ll get in touch with you to get you registered in next to no time.

How SG Umbrella can help you

When you’re just starting out it can be tough to get your head around your accounting needs, especially when you’re busy getting contracts and making new client connections. Here at SG Umbrella we can help by advising you on what’s the best possible option for you based on your personal and professional needs. Simply get in touch with our team to find out more, or take a look at our blog on getting started.