There are many benefits to working with an umbrella company for contractors, it’s no surprise that this has become an increasingly popular route in recent years. From making the contractor an employee and therefore paying them a salary, to offering them a range of statutory benefits, umbrella companies offer the freedom and flexibility of contracting coupled with the security and ease of employment.
That’s why thousands of contractors choose the umbrella route vs the limited company or PAYE agency options. What’s more, with upcoming reforms to IR35 due to come into effect from April 2021, many limited company contractors are understandably worried about what impact this will have and are therefore looking towards choosing the umbrella company route as an alternative.
Whether you are new to contracting altogether or are a limited company contractor considering making the move, Umbrella Broker outlines the top 5 benefits of working with an umbrella company.
Avoid IR35
As we’ve already touched on, many contractors choose the umbrella company route to avoid getting caught up in IR35.
IR35 is a piece of legislation that was first introduced in 2000 to stop workers such as contractors from operating as ‘disguised employees.’ This meant stopping workers from offering their services in a way which allowed them to avoid paying tax and National Insurance.
Initially, it was the contractor’s responsibility to determine their own IR35 status, however as HMRC deemed that too many companies were not compliant, in 2017 in the public sector it became the responsibility of the client to determine the contractor’s IR35 status.
This meant that thousands of contractors were classified as inside of IR35 regardless of their actual circumstances and many paid too much in tax as a result.
From April 2021, further changes to the legislation will be rolled out in which it will become the responsibility of private sector clients, not contractors, to determine the contractors’ IR35 status. This means that many of the 170,000 limited company contractors in the UK are set to be badly impacted.
However, there is a way for contractors to ensure exemption from IR35 altogether, contracting through an umbrella company.
As an umbrella company makes the contractor their employee, they are automatically outside IR35 and therefore don’t have to worry about getting caught up.
Contract the hassle-free way
A limited company contractor must source and secure their own contractor work. Run their own business taking on the paperwork and admin associated with this, calculate and submit their self-assessment tax return putting aside money for this and submit invoices to the client.
An umbrella company, on the other hand, aims to make the contractor’s life as easy as possible. The umbrella company takes care of admin, invoicing the client and will even pay the contractor a salary that has been processed through PAYE meaning all tax and National Insurance payments are worked out and deducted.
All the contractor must do is submit their timesheet and the umbrella company takes care of the rest. That’s why thousands of contractors opt for the umbrella company route as an easy, hassle-free way of working.
Get paid through PAYE
As we have already mentioned, whereas limited company contractors work off-payroll and therefore must file for self-assessment and pay tax annually, umbrella company contractors instead pay tax through PAYE.
This is because the contractor is made an employee of the umbrella company. Here, the umbrella company pays the contractor a salary, processes their tax through the PAYE system and deducts this from their income before it is paid to them. This means umbrella company contractors do not need to worry about tricky tax calculations and having to set aside part of their pay to cover tax.
Many umbrella contractors see this as a big advantage as they have the freedom and flexibility to operate as a contractor with the benefits and ease of being an employee.
Enjoy employee benefits
Another benefit of working through an umbrella company is that it entitles contractors to statutory benefits enjoyed by employees, from sick leave, holiday pay, a workplace pension to maternity and paternity leave.
Again, this offers contractors an added layer of security and means they can rest assured that should they fall ill, or just want to take a well-earned break, that they qualify for paid leave and don’t have to pay out of their own pocket as a limited company contractor would.
Enjoy freedom and flexibility
With an umbrella company, contractors don’t incur the financial demands of running their own limited business and won’t have to deal with the admin and paperwork involved.
They still enjoy the freedom and flexibility to choose which clients they work with and what contracts they work on and when, however, they don’t have to deal with running a business. This suits many contractors who want control over their contracting careers, but don’t want to deal with the hassle of setting up and running a limited company. This is also why thousands of contractors choose umbrella vs PAYE, as PAYE agency contractors cannot choose their own contract work.
That’s why many consider an umbrella company as the sweet spot between a limited company and PAYE agency.
If this sounds like the best route forward for you, the next step is to choose the best umbrella company to work with. That’s where Umbrella Broker can help.
