How Do Umbrella Companies Work?

Google reviews
November 09, 2016
n

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 Info@biaccountancy.com today.

umbrella icon

Resources

Recent Articles

Parents of teenagers can extend Child Benefit claim online

Parents of teenagers can extend Child Benefit claim online

HMRC is reminding parents of 16 to 19-year-olds to extend their Child Benefit claim by August 31 to ensure their payments continue. Last year, 870,000 parents extended this benefit, with most confirming the extension online. You can use either the HMRC app if you have...

HMRC surveys suggest job perk changes are on the horizon

HMRC surveys suggest job perk changes are on the horizon

HMRC has published two new surveys which leading advisory firm BDO are concerned could result in the removal of valuable employment perks, such as salary sacrifice pension schemes and Benefit in Kind arrangements, during the Chancellor’s Autumn Statement. One survey,...

New Pension Schemes Bill to benefit 20 million workers

New Pension Schemes Bill to benefit 20 million workers

The Government’s new Pension Schemes Bill is expected to make it easier for millions of people to manage their pensions, by improving returns, and combining smaller pension pots to create bigger and better pension funds. The benefits of combining smaller pension pots...

Ready to join us?

Whether you’re a contractor, freelancer, or small business, Bright Ideas can help remove the burden of time-consuming and complex finances. We’ll draw on our years of knowledge and experience earned helping sole traders just like you.

When you choose us, you’ll be assigned a dedicated Account Manager who’ll provide one-on-one support that’s customised to your business. Communication is key, so we’ll always answer your questions or requests as soon as we can. In fact, we offer a same-day response guarantee for emails and calls received before 3pm.

Contact us to get started

Give us a call us or send an email today!

Looking to Switch Accountants?

Does your current accountant give 1-to-1 support? Are they fast and thorough?
Slap-dash services hold businesses back, so try our expert accountants instead. We make the transition simple, get in contact with us today and we’ll start the process.

Start the conversation

Let’s make your finances Brighter

Call us Monday to Friday 9am - 5pm

0161 669 4221

Request a call back