How Do Umbrella Companies Work?

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November 09, 2016

Millions of people ply their skills as a contractor, working on jobs for several weeks or months at a time. For professionals who want the freedom of self-employment, without the administrative burden that comes with it, operating under an umbrella company is a popular solution.

But as a newcomer to the contracting world, you might be wondering how umbrella companies work. If you’re looking to demystify this term and understand what it means for you as a contractor, you’re in luck. Allow us to outline the basics:

A happy compromise

HMRC classifies the self-employed as people who manage their own finances. But as a skilled professional, you might be turned off by the idea of tax assessments, chasing invoices and keeping your accounts in good order. This can put many people off making the leap to going solo, leaving their contracting dreams unfulfilled.

Thankfully, though, there’s a middle ground between dependency and flexible work schedules. Umbrella companies bridge this gap with contracts that put you on their payroll. They will liaise between you and your client or agency, so that you receive your net income at the end of the month, just as an employee would.

All you have to do is log your time and expenses through the umbrella company’s online portal, and they’ll take care of invoices and paperwork. As such, it’s ideal for contractors who are finding their feet as independent professionals.

Remembering where you stand

So, what are the benefits and drawbacks? As we mentioned, umbrella contractors are not considered self-employed, which definitely has consequences for your take-home pay, and the way in which you operate.

Joining an umbrella company gives you peace of mind that you will be paid – and on time for that matter. It’s a low risk solution that’s easy to set up and manage, so that you can focus on what you do best. Some even come with insurance and employee benefits, like discount schemes.

However, there is of course a caveat. Umbrella companies inevitably eat into your hard-earned profits, both in terms of the fees they deduct from your income, and the extra tax you pay as an employee.

As such, most contractors switch from umbrella schemes in the long run, setting up a limited company instead to maximise their earning potential. Yes, it takes some time getting used to, but if you have ambitions to grow, it’s the most profitable route to success. Hence, we strongly suggest that anyone looking to the future explores incorporating their business.

Umbrella companies are popular for a reason, easing the burden of handling your bookkeeping and accounts, especially in those early stages. That said, it’s often seen as a stepping stone to becoming a fully-fledged independent professional, so consider your plans before making a decision.

Bright Ideas Accountancy have been assisting the self-employed for years, and we’ve only gotten better at it. For more details about umbrella and limited companies, call us on 0161 669 4221 or email today.

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