Umbrella companies have become an increasingly popular avenue for contractors over recent years.
After all, they provide a wide range of benefits for contractors, from ease of use to statutory benefits, making them a great alternative to operating through a limited company or PAYE agency.
What’s more, from April 2021 we will see big changes to IR35 legislation and with this comes understandable worry for limited company contractors over how reforms will impact them. This has led many to consider operating through an umbrella company as an alternative, which automatically makes the contractor exempt from IR35.
To help contractors learn more, we have put together this handy guide on the benefits of working with an umbrella company in 2021, so you can see if it’s the right path for you this new year.
Ease of use, freedom, and flexible working
One of the main benefits of working with an umbrella company is that they make contracting hassle-free and easy.
Contractors using an umbrella company simply submit their time sheets and expense claims and the umbrella company will sort the rest, ensuring the client is invoiced and the contractor is paid.
Working through an umbrella company gives contractors the flexibility of being in control of what contracts they work on and when, whilst relieving them of having to deal with the paperwork, admin and tasks that come with running a business like a limited company contractor would.
Don’t get caught out by IR35
Many contractors choose to operate through an umbrella company to bypass IR35 legislation. After all, as the umbrella company employs the contractor, they are automatically exempt.
As changes to IR35 legislation are set to come into motion from April this year, many are now making the move to umbrella to avoid getting caught up.
IR35 is a piece of legislation that aims to identify contractors and other self-employed individuals that are avoiding paying the correct levels of tax and National Insurance by working as ‘disguised’ employees.
Before 2017 in the public sector, it was the responsibility of the contractor to determine their own IR35 status, however this changed when HRMC considered that too many companies were not compliant.
From then on, it became the responsibility of the client to determine the IR35 status of a contractor. In reality, this led thousands of contractors to be wrongly classified as inside of IR35 regardless of their actual circumstances and many overpaid on tax.
From April 2021, this will also be the case in the private sector. This is worrying news for the 170,000 limited company contractors out there.
However, there is one way to avoid the problem – by going umbrella.
As we’ve mentioned, the umbrella company makes the contractor their employee meaning they will avoid IR35 altogether.
Enjoy statutory benefits
Another benefit of working with an umbrella company is that it entitles contractors to statutory benefits enjoyed by employees.
This includes holiday pay, sick pay, a workplace pension and maternity/paternity leave.
This offers the contractor a great level of security and means if you do ever fall ill, or just want to take a holiday, you will be covered financially. This can be a huge sigh of relief for contractors and is just one reason many choose the umbrella route. After all, those that operate through a limited company will be required to pay out of their own pocket should they wish to take a break or are too ill to work.
Forget tricky tax calculations
Umbrella companies aim to make the life of a contractor as easy and as hassle free as possible. Not only does the umbrella company take care of the admin side of running a business, they also calculate and deduct tax and national insurance from the contractor’s pay prior to them receiving it.
That means there’s no need to worry about any tricky tax calculations.
As an employee of the umbrella company, the contractor’s salary is processed through PAYE, meaning the correct levels of tax and National Insurance are deducted before it is paid to them.
This is in contrast to limited company contractors who have to file for annual self-assessment, working out what they owe in tax and National Insurance after they have been paid their fee. This can often be complicated and also requires the contractor to hold back the correct amount from their fee to cover the tax bill at the end of the year.
Umbrella vs PAYE
As we have mentioned, working through an umbrella company allows contractors to find and choose their own contract work, giving contractors a great deal of freedom over their career development and progression.
That’s why many contractors choose the umbrella route over PAYE. After all, a PAYE agency does not allow the contractor to pick which contracts they work on and when.
This is one of the reasons many contractors see an umbrella company as the perfect medium between PAYE and a limited company. Umbrella offers the freedom of contracting through a limited company, with the security of employment offered by a PAYE agency.
If this sounds like the best route for you, the next step is to choose the best umbrella company to work with. This where Umbrella Broker can come in handy.
