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.
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