A Guide to Umbrella Companies

Guest Blog by John T Hughes

It’s time to start thinking of the term ‘umbrella’ as something other than an item that can protect you from our lousy British weather. In today’s society, the umbrella company is a concept which is increasingly thrown around, yet unless you are considering becoming self employed or a freelance worker you are probably unaware of what the term means or what these companies do.

An umbrella company simply brings together different contractors (individuals who are not employed permanently by a company) such as builders or IT engineers underneath one body or ‘umbrella’. Contractors chose join an umbrella company for different reasons.

Why do people choose to contract, go freelance or become self employed?

Lets go right back to the beginning. Deciding to go freelance or self employed is a major decision but as you progress through your career you may reach a point where ‘going it alone’ seems like a better option. One of the main reasons people chose to become self-employed is the freedom if offers. This may mean you are lucky enough to switch between the days and hours you are willing to work. Choosing to contract allows many the flexibility to spend more time with the family or to simply have more time to themselves. The self employed are free from the frustrating restrictions of the all-empowering employer. If you are unhappy with your employer as a contractor you can easily move on. In addition, freelancing offers a wider range of exciting job opportunities. You may be working for a small independent firm one moment or a national company the next, meeting a broad spectrum of people and expanding your client list.

Contractors generally work through an agency to secure contracts with different employers. Often, the agency will add you to their own in-house payroll system. If you live close to where you are being contracted and therefore have little to reclaim on expenses such as transport then this option may be suitable. On the other hand, if you are contracted to different employers in different areas of the city, county or country, you are entitled reclaim expenses for tax relief. If you work away a lot and are spending money on transport, accommodation and subsistence, this could amount to a lot of income being lost if you are with a agency who do not wish to calculate your deductions.

Why work through an umbrella company?

As discussed above, people chose to contract because they want more freedom and independence. Going it alone means that you are solely responsible for filling in all PAYE and tax returns which HM Revenue and Customs (HMRC) legally require you to do. Those who are experienced in accounting and filing tax returns may wish to tackle this themselves. However, despite the government’s claims that ‘tax doesn’t have to be taxing’, completing all the relevant paperwork can add hours to yours to your work schedule; the exact reason why people contract in the first place.

First time freelancers or the newly self employed should be aware of the importance of filling out tax forms accurately and on time. The tax man doesn’t care about mistakes, even if they are genuine errors, and will come down hard on any paper work that is not up to scratch. Such mistakes can be expensive and cost your new venture dearly.

Umbrella companies also put you in touch with your hard earned cash by ensuring you claim back all expenses you are entitled to either from the end client or recruitment agency. In this sense, a contractor and an umbrella company form a unique partnership; as long as you are providing the correct receipts for expenses incurred, then an umbrella company will take the stress out of reclaiming. Relief on expenses consequently reduces your overall tax and NIC contributions, increasing the money that you eventually take home in your pocket. Umbrellas take the weight off you by filing paper work and administration duties on your behalf, giving you peace of mind that the tax man is also a happy man.

Convinced that an umbrella company may give you the support and encouragement you need to forge a career as freelancer? It could be the missing the link to a new independent career.

For the self-employed, tax can be a headache. Using an umbrella company or forming a limited company can be an efficient way to manage tax affairs, but ensuring you get the right structure for your business is essential.

Article Source:  A Guide to Umbrella Companies