Is an Umbrella Company Right for Me?
You may have heard of the term "Umbrella Company" but have no concept of what it means, let alone whether it's right for you. So let's start with a look at what they are.
An umbrella company is a large limited company that acts almost as an agency on behalf of contractors from various agencies. In most cases, a contractor is a self-employed person who carries out work for various companies. Some companies are wary of taking on a self-employed contractor and so ask for invoices to be supplied by a limited company. This is the domain of the umbrella company. The umbrella company allows the self-employed contractor to carry out the work and then invoices the organisation once the work is complete. However, by working under an umbrella company you would be treated as an employee rather than self-employed, but still retain the flexibility of being self-employed.
This may seem like a simple solution to the problem, but there can be issues that arise from it.
The Problems with Umbrella Companies
There can be a number of downsides with using an umbrella company. Firstly, they mostly operate in an agency style and impose charges and service fees on the contractor. This could be in the form of a percentage of the money earned by the contractor through their work with the company.
There is the added disadvantage of how the contractor is paid for the work carried out. Usually the umbrella company will use PAYE, as you would be an employee of the company. This means that on top of the charges and service fees, you would also be subject to Income Tax and National Insurance Contributions.
If the contractor finds that using an umbrella company isn't cost effective for them, the alternative could be to set-up their own limited company. Some contractors may think that this isn't worth the paperwork and hassle. But by using our simple 3-step process, we take the hassle out of forming your company.
The Advantages of having a Limited Company
Any contractors that create their own limited company, rather than use an umbrella company will have the final say over who they work with and how they're paid for the work carried out (as well as how their wages are paid). This could be a more tax efficient method than would be used by an umbrella company, such as taking dividends. For more information about how to get paid as a director of a limited company, take a look at our previous post.
Also, the umbrella company may try to dissuade contractors from setting up on their own by telling them that the fees involved are too high. However, this isn't the case. No only that, but if the contractor works for multiple clients over a period of time, then the cost can be justified.
It may seem as though umbrella companies are the way to do business when you're a self-employed contractor. At the time they may be the best solution to the problems faced, especially when you're just starting out. But over time they not work out to be the answer you're looking for.