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UMBRELLA COMPANIES EXPLAINED

What is an Umbrella Company?

If you choose to use an Umbrella Company, you will avoid many of the administration duties associated with running a Limited Company.

Essentially you will be employed by the Umbrella Company and will submit timesheets and expenses to the Umbrella Company who in turn will manage all the administrative burdens for you, for a monthly fee (usually a percentage of your earnings).  The Umbrella Company will generate and send an invoice to your client, follow-up on payment and calculate your tax and National Insurance.  You will then be paid the net amount direct to your bank account as a PAYE employee of the Umbrella Company.

On average, working through an Umbrella Company could result in you taking home 60 to 65% of your total contract earnings.

For individuals who are new to contracting or for a short term contract, this is an easy way to enter the contracting market, however fees charged by Umbrella Companies vary considerably and can be substantial.  For those contractors who are entering a long term contract or wanting the best possible returns, a Limited Company may be the better option.

If you would like to discuss these options further or to assess the best option for your individual circumstances, please contact us.

What are the advantages and disadvantages of Limited vs Umbrella Company?

If you are a first time contractor, it can be difficult to identify which structure is right for you – a Limited Company or an Umbrella Company.  We have summarised the key differences and pros and cons for each below and would be happy to discuss these in more detail as well as advise on other potential structures to maximise your tax savings.

LIMITED COMPANY – PROS

  • The most tax efficient method to maximise your take-home pay
  • Simple to operate – you simply manage your accounts through the OpenBooks Online Accounting system
  • A wider range of expenses can be claimed, thereby increasing your take-home pay
  • Greater opportunity for tax planning than via a PAYE Umbrella Company
LIMITED COMPANY – CONS

  • There is some administration involved in running a Limited Company, even with an accountant supporting you (approximately 10-15 minutes of paperwork a month)
  • It can be costly to set-up if you only plan on consulting for a short period of time
UMBRELLA COMPANY – PROS

  • Very easy to use – you simply complete and submit your timesheets and expense claims
  • All tax and NI is deducted by the Umbrella Company, so you will receive a net salary and have no further taxes to pay
  • No time consuming administration as the Umbrella Company manages this on your behalf
  • Best suited to individuals who are new to contracting or for a short term contract
UMBRELLA COMPANY – CONS

  • The monthly fee charged by the Umbrella Company can be substantial
  • Your salary is subject to full PAYE Tax and NI – essentially you are treated like a ‘permanent employee’ in the Umbrella Company