Contractors have two options when starting out – set up a limited company or opt for an umbrella company. Those who want to get on with building their business without the hassle of dealing with all the financial stuff tend to go for an umbrella company, which will tackle a lot of the confusing monetary aspects of becoming a contractor.
When you’re only planning on contracting in the short-term, umbrella companies can be even more useful. A small one-off project often does not warrant the hassle of dealing with the financial side of things yourself, and this is where umbrella companies can step in to help.
Which responsibilities do umbrella companies take off your hands?
When using an umbrella company, you’re essentially outsourcing your payroll, thereby taking away a lot of the hassle that comes with setting up your own limited company.
If you go with an umbrella company, you will not be a director or have the responsibilities that come with running a limited company.
The organisation will also look after all matters associated with taxation and accountancy, and also deal with all the administration. This means that, for the short time you will be contracting, there is no need to worry about employing a reliable accountant or completing complicated VAT returns. You also wouldn’t have to concern yourself with taxation, mortgage applications, or anything of this nature. This is because you would technically be an employee of the umbrella company, which acts as your employer.
Your tax and National Insurance contributions (NIC) will all be up to date, as the payroll is processed through PAYE. In contrast, tax and NIC liability through a Ltd company is processed at the end of the financial year, meaning you will have a new tax bill to pay.
IR35 is something of a headache for most contractors. It is defined as the way in which the taxman closed a loophole allowing many contractors to avoid paying much of their tax and NIC, and is something people with a limited company need to think about.
Umbrella companies can be better value for money
Forming and running a limited company is an expensive process, and for a short-term contract, this is often simply not worth it. If you will be contracting for three months, for example, forming a limited company is just not effective, as your account will be set up for a minimum of one year.
As an umbrella company acts as your employer, you may be able to claim a number of your expenses back from them. Legitimate claims are those incurred as a result of the contract. These are the business expenses that HMRC allows the umbrella company to pass onto their contractors.
What if your move into contracting is a test run?
People who are not happy in their current job, but are not sure whether contracting is for them may dip a toe into the pool of self-employment before properly taking the plunge. If you are one of these people who is keen on trying out contracting, or are simply contracting while you are in between jobs, an umbrella company is ideal as there is minimum input required on your behalf.