Self-employed contractors can choose to work through an umbrella company rather than setting up their own limited company.
But the advantages of using an umbrella company often depend on your IR35 status and whether you’re contracting for the long-term. Should you use one?
An umbrella company, or PAYE umbrella, is a company that self-employed contractors can join as an alternative to setting up (and working through) their own limited company.
When you join an umbrella, you become their employee. The umbrella acts as an intermediary between you and your recruitment agency (or end client). It deals with administration (like accountancy and taxes) and means you don’t have to take on the responsibility of running a company yourself.
Your umbrella company also handles payroll. They invoice and get paid for the work you complete. Then they pay you through PAYE, deducting costs like taxes, National Insurance contributions and workplace pension payments.
Running a limited company can be challenging and won’t always be the best choice for contractors.
If you’re a new contractor, you might not want the hassle of setting up a limited company straight away. Likewise, if you know you’ll only be contracting for a short time, you won’t want to go through the process of setting up a limited company only to dissolve it in the future.
You can do away with administration by using an umbrella company. It means you won’t have to keep company records, file VAT returns, and keep up with all the other responsibilities you would have as a limited company director.
When it comes to getting paid, the contractor keeps timesheets, which they give to the umbrella company. Payroll is then processed from there.
But if you do all your contracting through an umbrella company, you won’t enjoy the tax efficiency of a limited company, as pay is subject to PAYE whatever a contract’s IR35 status.
A contractor can work on contracts both inside and outside IR35, as off-payroll status applies to contracts and not to the contractor themselves.
Some contractors who only work inside IR35 might choose to use an umbrella company to reduce administration (and because calculating tax and National Insurance can be complex).
You can still run a limited company and work on inside IR35 contracts. You can even run a limited company and work through an umbrella company at the same time.
Use this as a guide only and keep in mind the right choice for you will depend on your circumstances – it’s best to research your options and speak to a professional if you’re not sure.
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