Categorized | umbrella companies

As a contractor, why should I work through an umbrella company?

As a contractor, why should I work through an umbrella company?

Umbrella companies have been around in one form or another for a while, but only really came to prominence with the advent of IR35 in 2000.

The idea is that if, under IR35, you are going to be paying taxes at the same level as a permanent employee, why have the additional hassle of running your own company, or of being employed by the agency with the limitations on finding work that implies. Using an umbrella simply removes all such issues, making getting paid a much simpler process.

Of course, this only really applies if you believe your engagement is caught by the IR35 rules. If it is not, the savings through using your own company are significant. However, for now we will assume you are in fact inside IR35.

There is still a small saving to be made by using your own limited company, since you won’t have umbrella fees (although you may have roughly similar accountancy ones instead) and you can keep 5% of your gross to cover the basic cost of running the company. Nevertheless, the overall sums involved are comparatively small and can probably be disregarded.

By using an umbrella, you do not have to worry about payroll calculations, VAT calculations, completing assorted tax-related returns and managing company bank accounts. You do not need to go through the process of setting up your own company, getting a business bank account and registering for VAT. In other words, you can start contracting very simply with minimal preliminary work and can focus on doing the job you are being paid for.

As a result, umbrellas are ideal solutions for people new to contracting, for those who are unsure that contracting is the way they want to work long-term, and for people who are only going to be contracting for a few months, possibly in parallel to another job entirely. They also suit people who genuinely don’t want the bother of running a company – although in reality that is not that onerous for most contractors – and who do not want to be concerned about their IR35 status; as an umbrella user you are effectively an employee and IR35 cannot apply.

But step outside IR35, or decide to take up contracting full time, and you might then like to think about setting up your own company.

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Image: pink umbrella by pawpaw67

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