Many contractors will consider using an umbrella company, but how can you be sure that this is the right option for you?

After all, contractors have many needs and requirements, so it’s vital that you operate in a way that works for your contracting career.

To  help, in this guide Umbrella Broker outlines 6 reasons why every contractor should use an umbrella company, so you can see if this is the best option for you.

What is an Umbrella Company?

First, let’s look at what an umbrella company is.

An umbrella company has become a popular choice for contractors in recent times.

The company works as an intermediary between the client and the contractor and as such performs a selection of tasks on the contractor’s behalf. This is what makes them so popular as they take a lot of the hassle and hard work away from the contractor.

The umbrella company puts the contractor on their payroll. This means they collect the fee from the client, processes it through the PAYE system which deducts relevant taxes, National Insurance contributions and relevant pension payments before paying the contractor the correct amount.

So, unlike when a contractor sets up and works through their own limited company, the umbrella company takes on the business and finance side of things for them.

Next, we’ll look at the reasons why every contractor should use an umbrella company.

1. Avoid IR35

Umbrella companies have become an increasingly popular option, especially in light of new IR35 reforms that were introduced in April of this year. After all, contractors that work through an umbrella company are exempt from IR35 and therefore don’t have to worry about getting caught out and facing penalties and stressful investigations.

2. PAYE tax in a hassle free way

Another reason every contractor should operate through an umbrella company is that they make paying taxes easy and hassle free.

As your employer, the umbrella company processes the contractor’s fee through the PAYE tax system, meaning the correct deductions are worked out and taken from you before you receive the fee.

This means no worrying about stressful self-assessment tax returns as this is all taken care of for you. 

3. Hassle free contracting

Umbrella contractors also benefit from easy and hassle-free contracting.

When a contractor joins an umbrella company they won’t have to deal with the daily admin that comes with contracting. All the contractor needs to do is submit their timesheet to the umbrella company and they will sort the rest.

The umbrella company will invoice the client on the contractor’s behalf, collect the fee, pay the contractor their salary and take care of any tasks such as processing expenses or any paperwork that needs to be sorting.

For this reason contracting through an umbrella company is widely considered the easiest way to work as it does not require the contractor to set up and run their own limited company.

4. Contract flexibly

The great thing about working for an umbrella company is that it gives contractors a great degree of flexibility.

After all, should you decide that contracting isn’t for you, you don’t have the demands of having set up your own limited company which you will have to deal with closing down.

This makes an umbrella company a great choice for those looking to dip their toes into the world of contracting.

Or, should you simply wish to take a break from contracting, there’s no need to worry about having to continue to run a limited company. You can simply take time off and come back to the umbrella company at a time that suits you.

5. Receive pension contributions

Another benefit to operating through an umbrella company is that umbrella contractors receive a workplace pension.

This is due to the fact that in 2012 the government set up their Pension Auto Enrolment Scheme to encourage people to save for their pension.

This means that if you are an employee, you earn £10,000 or more and are over the age of 22 then you will be automatically enrolled onto a pension scheme.

This is great news for umbrella contractors who, as employees of an umbrella company, will automatically pay pension contributions to help them save for the future.

6. Receive statutory benefits

Finally, another reason that every contractor should use an umbrella company is that umbrella contractors qualify for statutory benefits.

These include:

• Holiday Pay
• Sick Pay
• Maternity/paternity leave

This means that the contractor will still get paid for taking time off work for these reasons.

This is because they are employees of the umbrella company meaning they receive the same benefits that any employee would. This is unlike limited company contractors who have to cover these costs out of their own pockets which can be a major drawback to this option for many.