Contractors can choose to operate either through their own limited company, a PAYE agency, or an umbrella company.

Each option has different implications for the contractor’s tax, how they operate and what benefits they will receive.

To help contractors understand how an umbrella company works, Umbrella Broker has put together this handy guide outlining everything there is to know about umbrella companies to help you determine whether this is the best way forward for you.

What is an umbrella company?

An umbrella company acts as an intermediatory between the contractor and client. An umbrella company will employ the contractor, in turn organising payments for the contractor and offering them a variety of benefits they would otherwise not receive if they were operating through a limited company.

Although the contractor chooses which clients they work with and which contracts they take on, the umbrella company retrieves the contractor’s earnings from the client. The umbrella company will process the contractor’s earnings, deducting the correct levels of tax and National Insurance from it.

Many contractors consider this a benefit to using an umbrella company as it means they do not have to deal with tricky tax calculations themselves through self-assessment.  

As well as making contractor’s lives more straightforward in terms of payment and tax, there is also a range of other benefits offered by umbrella companies.

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What are the benefits of working through an umbrella company?

Another advantage to working with an umbrella company is that it makes contracting easy and hassle-free.

Whereas a limited company contractor is responsible not only for securing their own contract work, they also have to deal with running their own limited business, taking on paperwork and admin tasks, invoicing the client, chasing late payments, filing for self-assessment and putting aside enough money to pay the tax bill at the end of the year.

On the other hand, all these tasks are taken care of for umbrella company contractors. The umbrella company deals with processing tax and National Insurance, paying the contractor’s salary, invoicing clients and dealing with business admin.

An umbrella contractor merely has to input their timesheet and the umbrella company will take care of the tricky tasks. For this reason, thousands of contractors consider working through an umbrella company a hassle-free way of contracting.

The contractor is able to enjoy the freedom of the contracting lifestyle, without having to deal with running a business.

 Another benefit to working through an umbrella company is that umbrella contractors get paid through PAYE.

As we’ve touched on already, an umbrella company will process the contractor’s pay through the PAYE system, the most common way of paying tax in the UK.

This means that the contractor doesn’t have to worry about filing for self-assessment which can be a difficult task.

Umbrella company contractors also benefit from receiving a range of benefits from the umbrella company. As an employee of their chosen provider, the contractor benefits from statutory benefits such as sick pay, holiday pay, a workplace pension as well as maternity and paternity pay.

This is contrary to limited company contractors who have to pay out of their own pockets should they wish to take a holiday or if they unexpectedly fall ill.

Most umbrella companies also cover contractors with basic levels of insurance, meaning there is no need for the contractor to cover these costs themselves.

As you can see, there are several benefits to contracting through an umbrella company, which is why thousands of contractors choose this route every year. So, how does an umbrella company work?

How does an umbrella company work?

Although the contractor is free to find and secure their own contract work, they operate through the umbrella company which employs them.

The contractor will sign a contract with the umbrella company, then, all they need to do is submit their timesheet each week, informing the umbrella company of their hours worked as well as any expenses they wish to claim.

The umbrella company will then invoice the client on the contractor’s behalf and directly collect the fee. They will then make the appropriate tax and National Insurance contributions through the PAYE system, paying these to HMRC before paying the contractor the correct salary.

In exchange for their services and benefits offered to the contractor, every umbrella company charges a fee, which is deducted from the contractor’s pay before it is processed for tax. To find out more about umbrella company fees and how much you can expect to pay, check out our handy guide.

Like every employee, the umbrella company will then give the contractor a payslip offering a breakdown of how much you are taking home as well as how much you have paid in tax and National Insurance.

This is in contrast to a limited company contractor, who is self-employed and therefore must organise their own pay, client relations, tax and National Insurance and insurance.

Is an umbrella company the best option for you? Let Umbrella Broker help with the next steps

Having read our handy guide to how an umbrella company works, if you’ve decided that operating through an umbrella company is the best move for your contracting career, Umbrella Broker are here to help you find your perfect provider.

Our easy-to-use umbrella company calculator makes finding the best umbrella company quick and hassle-free. There’s no need to spend hours searching the web for an umbrella company that works well for you, we will show you a list of the best-suited umbrella companies for your needs in a matter of seconds.

Simply head over to our contractor calculator, enter your key details including your contractor rate, as well as any requirements you have, whether that is help with things like childcare credits, and we will provide you with the top providers for you.

We show you exactly what you will receive from the umbrella company, including services, benefits and pay. We even show what your payslip will look like under each umbrella company, to ensure you’re making the best decision for you.

Ready to give it a go for yourself today?

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