What is an umbrella company?
An umbrella company is a third-party company that becomes your employer. Tax is paid on your salary under PAYE, just as you would if you were an employee of a company. Tax and NIC is deducted from your payments before you receive them, so you do not need to submit self-assessment tax returns. As your employer, the umbrella company also provides for your employment benefits and protection, plus the reimbursement of approved business expenses. Umbrella companies usually charge a weekly fee, which is deducted from your take-home pay.
But not all umbrella employers are the same and you should investigate a few before deciding which one might suit you best. There are links to various umbrella companies at the foot of this page and you will find others by searching on the internet.
Advantages of working under an umbrella company:
The key advantage that contractors find from working under an umbrella company is that the administration is simple. There are no tax returns to submit, no paperwork has to be filed with Companies House and the umbrella company deals with chasing up any unpaid invoices with your clients. This means that you have more time to focus on working and so can potentially earn more money. Working under an umbrella company means that you are not affected by IR35. You may also be able to claim and obtain tax-relief on your legitimate business expenses – which will provide a better return when compared to going directly onto an Agency PAYE payroll.
Some umbrella companies also provide their employees with insurance which might include: Professional Indemnity, Employers and Public Liability. Some also offer additional insurances available for people working in specific professions and HR advice should you need it. Others offer additional benefits which can include holiday pay, maternity pay, pension schemes and childcare voucher schemes.
Who should use an umbrella company?
It suits those contractors on short-term assignments, on assignments included under IR35 tax legislation and contractors on pay levels below £20 per hour. It is a suitable choice for anyone who wants a minimum of hassle as weekly or monthly pay is automatic and all your legal, employment, contractual and tax obligations are taken care of for you. It can also be the best option if you have visa restrictions.
Disadvantages of using an umbrella company:
The major disadvantage of working under an umbrella company is that the tax and NIC regime is less flexible and you don’t have the opportunity to reduce tax and NIC to a significant degree.
If your contract falls outside IR35 and your rate is high enough to make it worthwhile or you think you will be making a living as a contractor longer term then you should consider incorporating a Limited Company instead.
Incorporating and running your own Limited company may result in higher net returns after taxes but it does mean that you have more responsibilities.
Christy Media Solutions have placed many contractors within the broadcast industry, working with both limited and umbrella companies. It is a personal choice and we will work with you and support you, whichever route you choose.
We do not advocate any particular company, but the websites listed below were used as the sources of information for this article.
This list is not exhaustive and we would recommend you also do your own research and speak with your own financial advisor to ensure that you find the best solution to your personal circumstances.