Why have umbrella companies grown in popularity?

An umbrella company can help you

As a new contractor, your primary goal is to secure new business and ensure you have a solid client base which provides a sufficient revenue stream.

However, this is not the only issue you need to concern yourself with.

As a full-time employee, your tax affairs were handled by your employer, whose duty it was to ensure you paid the right amount of tax to the relevant authorities. As a contractor, you have more options available to you.

Others in your position who have little, if any knowledge of the tax requirements use the services of either an umbrella company or set up a limited company, with an accountancy service provider handling the administrative side of their affairs in the case of the latter.

Deciding between an umbrella company and a limited company is one of the key decisions you will have to make when setting out on the road as a contractor. Both have their advantages and disadvantages which you need to consider before making a decision.

In recent years, umbrella companies have become increasingly popular for several reasons.

Tax calculations

The UK's tax laws can be difficult to understand and the consequences of tax mistakes can be significant so it is an area you cannot afford to cut corners with.

One of the main benefits of an umbrella service is that your tax and National Insurance contributions are calculated and deducted by them before you receive your money, meaning you do not need to worry about the complicated process of calculating how much you owe.

No IR35 concerns

You are legally an employee of the umbrella company paying employed levels of tax, so you don’t need to worry about compliance with IR35.

Setting up is easy

Setting up a limited company can be quite time consuming. You can be set up with a reputable umbrella company within 10 minutes.

Suitable for long and short contracts

Maybe you are new to contracting, if so umbrella companies can help you through this transitional period, meaning you can concentrate on the important business of generating an income.

Also, whether you are entering into long or short assignments, an umbrella company can support you and ensure the whole experience runs as smoothly as possible.

Compliance

There are various laws in place to govern contractors, particularly relating to tax.

Employment with an umbrella service can ensure you remain on the right side of the law and avoid any costly legal issues that may arise if you were to go it alone.

Working as a limited company is by far the most tax efficient way of working however there are certain restrictions in place which determines what type of contractor can set up in this way and it’s important to ensure your circumstances are in line otherwise you could end up with a hefty tax bill.

An umbrella service doesn’t carry any of these risks so if you want minimum hassle, an umbrella company could be the way forward.