Whether you are new to contracting or are a seasoned contractor, making the right decision for your payroll is essential. When answering the question “should I use an umbrella company?”, you need to take into consideration whether you are inside or outside IR35 legislation, and whether an umbrella company is the best option for you based on the assignments you want to work on. Keep reading and we’ll help you decide if an umbrella company is the best payroll service for your circumstances.
Benefits of using an umbrella company
Working via an umbrella company is not the most tax-efficient way to operate as a contractor. However, it is often regarded as the easiest way to get paid and offers a more hands-off approach to contracting – perfect for first-time contractors or individuals who do not want to set up their own limited company. Essentially, the umbrella company will become your employer and will take on the majority of the administrative tasks and payroll related paperwork. This will allow you more time to focus on your clients and assignments.
Whilst using the services of an umbrella company, you are paid through HMRC’s tax system PAYE (Pay As You Earn). This means that all your tax and National Insurance Contributions are paid to HMRC on your behalf. As long as the umbrella company you register with is compliant, you will never receive any unexpected tax bills from HMRC. And, when you work through an umbrella company, you do not need to worry about IR35. This is because you are taxed like a permanent employment (and in a similar way to being inside IR35).
Who should use an umbrella company?
Umbrella companies are diverse and can support contractors and freelancers all over the UK, regardless of their role, experience, or income. However, umbrella companies are often used by:
The responsibility of setting up a limited company can be quite daunting, and there is a lot of administration and deadlines to be mindful of. If you are new to contracting or are considering contract work, umbrella companies are a great way to test the water and see if it is something you want to pursue. They are easy to use, and most umbrella companies do not have a tie-in period; you can use them as and when required.
Individuals working on short-term contracts
If you only take on short-term contracts or do not plan on contracting for long, it may not be beneficial to set up a limited company. For ease of use, contracting via an umbrella company may be the best option for you. Setting up a limited company requires a lot of work that is not time or cost-effective for short-term contractors (temporary workers who want to return to permeant employment in a short timeframe). An umbrella company will take care of everything for you, and you do not have to worry about closing down a company once your contract is complete.
Contractors who take on multiple assignments at the same time
Many contractors and freelancers will take on multiple short-term contracts for different clients at the same time. This can negatively affect your tax code if you are enrolled on various agencies PAYE systems – as you will have multiple employers. When you register with an umbrella company, you will benefit from continuity of employment as the umbrella company becomes your sole employer. Regardless of how many contracts you accept or the number of agencies you use, all of your income will be paid through the umbrella company, and your tax code will not be negatively affected.
Contractors who do not want to set up their own limited company
Understandably, not every contractor wants the hassle of setting up and running their own limited company. As a limited company director, you must adhere to strict record-keeping requirements are responsible for annual filing duties, and your personal and company information is disclosed on public records. Using an umbrella company is a more suitable method of payroll if you want an easy life with minimal administration.
Contractors whose assignments are inside IR35
Off-payroll in the public sector was introduced in April 2017. As per the legislation, contractors and freelancers working in the public sector are no longer able to determine their IR35 status. Instead, the responsibility falls to the public sector body providing the assignment. If your work is deemed as being inside IR35, the fee-payer (whether it is your recruitment agency or end client) will make the necessary tax and National Insurance deductions – before making a payment to your limited company. Many contractors found operating through their limited company was no longer a feasible or tax-efficient option because they were deemed inside IR35. As a result, many switched to using an umbrella company for their payroll.
Off-payroll in the private sector is due to come into effect from 6th April 2021. From this date, if you are a contractor working in the private sector, your IR35 status will be determined by the private sector organisation you are working for – very similarly to the public sector. If your contract is deemed inside IR35, using an umbrella company will ensure you do not fall foul of IR35 legislation because the umbrella company employs (and makes sure the correct tax and National Insurance deductions are paid to HMRC on your behalf). You will also have access to Employee Benefits and insurance cover as part of the service.
Are you interested in registering with an umbrella company?
Whether you currently operate through your own limited company and are looking to switch, or would like more information about our PAYE umbrella service, our expert team would be happy to discuss your options. We are backed by professionals with over 20 years’ experience in the contractor payroll industry, and our commitment to compliance is second to none. We’re proudly accredited by the Freelancer and Contractor Services Association (FCSA).