I'll be discussing what umbrella companies do, where they came from and the five key questions to ask before joining one. After reading this article you'll be an umbrella company expert - I promise...
WHAT UMBRELLA COMPANIES DO
An umbrella company offer a simply 'pay as you go' payroll alternative to freelance contractors in the UK wishing to work through their own limited company as opposed to PAYE at the recruitment agency or end client. A traditional umbrella company employs hundreds if not thousands of contractors, paying them on a weekly basis following the submission of a timesheet. The main tax advantage for contractors is that they are able to offset the cost of their travel and subsistance expenses against their taxable pay. This equates to a higher net take home salary.
WHERE UMBRELLA COMPANIES CAME FROM
Umbrella companies were spawned following the introduction of IR35 back in April 2000 and became hugely popular after the Management Service Company Legislation in April 2007. They are seen as one of the last remaining 'compliant' payroll methods, taxing contractors fully under PAYE, after the deduction of allowable business expenses.
Nowadays, there are over 100 umbrella providers in the UK employing in excess of 200,000 freelance contractors. Recruitment agencies love umbrella companies because they reduce payroll administration. Contractors love umbrellas because they generally take home more money than straight PAYE at the agency or client. HMRC are somewhat on the fence - whilst they have recently considered legislating against them, they are also aware that if umbrella providers didn't exist, more contractors would almost certainly work through their own limited company and therefore pay less in combined taxes.
5 QUESTIONS TO ASK BEFORE JOINING AN UMBRELLA COMPANY
1. How do I know you are compliant?
THE BEST UMBRELLAS ARE MEMBERS OF PROFESSIONAL BODIES SUCH AS AEMC, PROFESSIONAL PASSPORT OR SPA.
2. How much do you charge?
EXPECT NOTHING MORE THAN £30 PER WEEK
3. Do I need to keep receipts?
THE ANSWER IS YES
4. What insurance do you have?
EXPECT PUBLIC & EMPLOYERS & PROFESSIONAL INDEMINTY AS STANDARD
5. Do you pay me via CHAPS, BACS or FPS?
WITH CHAPS & FPS YOU GET YOUR MONEY THE SAME DAY, NOT THREE DAYS LATER
So there you go, umbrella companies in a nutshell. Now that you're an umbrella company expert, you can head over to the freelancesupermarket.com forum and tell us what you think of them. In case you were wondering, I think umbrella companies are great, you hear me GREAT. So there, off you go and join one...
Lance Hooper Bartlett
Strongly opposed to IR35, Family Business Tax and the Agency Workers Directive.
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Image: Free Rainbow Mini Drink Umbrellas Creative Commons by Pink Sherbet Photography