FAQs about umbrella companies

Thursday, 19 April 2012 02:33

Umbrella companies provide valuable services

Umbrella companies provide valuable services

One of the most important decisions for anyone thinking about becoming a contractor is whether to set up a limited company or employ the services of an umbrella company.

Both have their advantages and disadvantages and it is important to weigh up the pros and cons of each option and decide which is best for you given your aims and personal circumstances.

Below, we answer some of the most important points regarding umbrella companies and why they are used by contractors.

What are umbrella companies?

Umbrella companies employ individuals to work on temporary assignments for recruitment businesses and their clients.

What do umbrella companies do?

One of the downsides of contracting is the amount of paperwork you are required to complete.

If you choose to work through an umbrella company you become employed by the umbrella company and as your employer, it pays you directly into your bank account after deducting taxes that need to be paid to HM Revenue and Customs. Furthermore, an umbrella company will also issue invoices to clients and chase payments.

What are the benefits of umbrella companies?

As mentioned above, the administrative burden of being a contractor is taken away from you, meaning you can concentrate on the work at hand.

Other benefits include the fact that your taxes are deducted at source, meaning you do not have to worry about unexpected bills at the end of the tax year.

Also, as you are employed by the umbrella company, you benefit from full employment rights. In addition, you do not have to worry about complying with IR35 or MSC legislation, which can be complicated to follow.

What are the downsides of umbrella companies?

If you set up a limited company, payments can be made to the company which you can then withdraw as a dividend rather than a salary. The benefit of this is that it reduces the amount of tax you pay.

This benefit does not exist if you work through an umbrella company.

Why work through an umbrella company rather than set up a limited company?

The decision between setting up a limited company or working through an umbrella service will come down to what is most important to you and what your personal circumstances are.

While there are tax benefits to setting up your own personal service company, there is a significant amount of paperwork that must be completed.

In addition, you need to handle all of your tax affairs and submit accounts to HMRC. You can engage the services of an accountancy services provider to do this, however, this will cost you.

Umbrella companies are therefore seen as the more convenient option.

Can I claim expenses via an umbrella company?

You can claim allowable expenses in line with HM Revenue and Customs guidelines.

Where can I find out more about working under an umbrella company?

You can find out more by speaking to PayStream about the benefits of using an umbrella service and whether it is the right choice for you.



Finance articles

  • How to form a limited company

    If you are confident that you will fall outside of the IR35 regulations and would like to minimise your tax burden, then you should be looking to operate as a limited company contractor. But how do you go about setting up a limited company?

  • Umbrella vs limited company – which is right for you?

    If you're looking to become a contractor, then you need to consider the two main options open to you – operating as a limited company or using an umbrella company. However, you must also be aware that this decision may be taken away from you.

  • How does the 24-month rule impact those utilising umbrella companies?

    The 24-month rule is something most people have come across, but many will admit they do not fully understand what it is. However, it is particularly important and must be considered when submitting paperwork to HM Revenue and Customs (HMRC).

  • What allowable expenses are available for the self-employed?

    Working for yourself makes for an incredibly exciting career choice. Not only do you get the chance to set your own hours and choose the projects that excite you the most, but it enables you to operate in a highly tax-efficient manner. Being self-employed also potentially allows you to receive a significantly higher income in comparison to doing the same kind of work as a permanent full-time employee, most notably as you could off-set tax against the expenses that you incur.

  • How the forthcoming Real Time Information system will affect reporting payroll data

    Being a contractor gives professionals the freedom to select their own working hours and choose the projects they work on; however, with that comes the need to look after their own payroll and tax issues. With HM Revenue and Customs (HMRC) set to introduce a new payroll reporting system later this year, now is the time for professionals to make certain they are aware of the changes this will entail.

View More Articles

Related stories

Top tips for buying an overseas property

Buying an overseas property can be risky

A dream property overseas is a tempting option but to ensure your dreams don't become a nightmare you need to pay careful attention to the legalities of buying home overseas.

Tax authorities join together on global tax avoidance crackdown

Uncle Sam and other tax authorities are planning a crackdown on tax evasion

Tax authorities from the UK, US and Australia are to join together to investigate tax evasion from some of the wealthiest people in the world after receiving huge amounts of data from a whistle-blower.

What are enhanced annuities?

What are enhanced annuities?

Enhanced annuities could boost your pension income by as much as 40 per cent

Why financial planning is important for footballers

Why financial planning is important for footballers

Why it is important for footballers to keep track of their finances and make sure they are signed up to the right type of financial products to suit income and lifestyle choices.

10 things you might not know about equity release

10 things you might not know about equity release

Equity release expert Alex Cross, Head of Product Management from McCarthy & Stone guides us through the important points to consider if you are planning equity release to help with your retirement.

ISA countdown: How to invest in a self-select ISA

A self-select ISA allows you to manage your own investments

Self-select ISAs allow you to manage your own investments and choose exactly what funds you invest in but you need to assess how often you will trade and how that affects fees.

How to invest in a stocks and shares ISA

Investment ISAs can provide better returns but are riskier than cash ISAs

With the ISA deadline just over three weeks ago, and if you want to try and beat the low returns available from a cash ISA, our guide gives the lowdown on investment ISAs.

FCA warns on interest-only mortgage "ticking timebomb"

Interest-only mortgages have been described as a "ticking timebomb"

New research from the Financial Conduct Authority has found that 37 per cent of people with an interest-only mortgage believe they have a shortfall in repaying the capital.

Newsletter sign up


In addition to the weekly newsletter, which areas of finance would you like to hear from us about:

Tick this box if you would like us to send you promotions from carefully selected third parties.

By signing-up you agree to the terms of use and privacy policy.

sign-up button

Get the latest information on: