Many find that being a contractor provides the flexibility and freedom to be able to concentrate on the clients they have to, and have a balanced work-life balance. However, there are challenges that arise when working for yourself and also managing your finances and making sure that you’re in compliance to tax and invoicing regulations.
Although you’re still an extremely small business, it should be easy to manage. However, as your business expands and expands, so will your administrative and financial obligations. In this stage you’ll need to think about the next steps – should you go with an unrestricted company structure or work through an umbrella company.
Which option is the best for you?
What is an umbrella business?
An PAYE umbrella company functions as a’middle-man that connects employers and contractors. This umbrella business is employer of the contractor and issues an invoice that the client later pays. In the event of a payment the umbrella company will pay the contractor’s salary from it, after deducting their own fees and any other deductions that are required.
While it may appear as if you’re giving away a significant amount of flexibility that comes with being an independent contractor at all the truth is that an umbrella business helps take a lot of anxiety out of the financial aspects of contracting.
They handle timesheets and payroll services and make sure that taxes are paid. It is possible to take business expenses on behalf of an umbrella business if the contract you have with your client isn’t subject to the ‘Supervision, Direction and Control’ (SDC) rules.
What is an umbrella company? How does it function?
The umbrella company sign an agreement with the final client.
You sign an agreement to the umbrella organization
You fill out a timesheet regularly, following an agreed upon amount of work time (usually every week) and get it signed by the client.
The timesheet is submitted to the umbrella company.
The umbrella company invoices the client.
The umbrella company receives the payment from the client and then prepares your paycheque
The umbrella company you work for gives you a salary, making deductions for tax as well as the umbrella company’s fees and any pension contribution
What are the advantages from an Umbrella Company?
As I mentioned the work of an umbrella company can make you be like giving back some of the power you had previously over your job. Another way of thinking about it is that it provides you with more time to relax and concentrate on your customer.
The benefits of joining an umbrella are:
No commitment
There is no requirement to sign any lengthy agreements with an umbrella company (which you might then be unable to exit). In a limited business you are bound to continue working and striving to make your business successful even if you’re struggling along the road. If you have an umbrella company it is possible to make a change of mind and go back to your regular job at the end of the contract.
Administration is not as important.
If your company is growing and growing, you’ll need to complete more tasks and, in turn more administrative work. It can be a challenging to reconcile while trying to make the best job for your clients. An umbrella company take care of issues like taxes, but they also have staff committed to tracking down your invoices, and making sure you are in compliance with the laws on a wide range of employment-related issues, and other issues.
Employer benefits should be maintained
One thing that can be a drawback when working as an independent contract worker is the fact that you can no more receive benefits as an employee, such as holiday and sick pay. Certain (although it is not always the case) umbrella companies offer sick holidays and pay as well as pregnancy payments as well as insurance for professional liability, which makes your life more enjoyable.
What are the drawbacks?
There are obviously some disadvantages being a part of an umbrella company that you need to be aware of prior to making a make a decision. They include:
Fees
If you’re looking to earn the most money in the amount you are able, then working as an umbrella business isn’t the best option. While the majority of firms only require modest fees, it could still be a significant amount in time. For workers with low wages, this can be detrimental to financial security.
Less Independence
One of the reasons people decide to work for themselves initially is that they feel more independent and be in complete control of their companies and their finances. When you work with the umbrella business, you’re dependent on the company to pay your wages and also to decide on taxes and payments for your expenses.
Fewer Tax Breaks
Directors of companies with limited liability are eligible for tax breaks that employees working for umbrella companies are not. Many people believe that the peace of mind that comes from not worrying about administrative issues is worth the loss of the tax benefits.
What Do I know to determine if an umbrella company is the most suitable choice for me?
Before you decide to choose a limited or umbrella company, it’s crucial to consider your own business and the ways you would like to conduct your business.
Different choices are the best option for various people, so there isn’t a hard and quick answer on whether an umbrella company is the right choice for you.
Consider the following factors when making your choice:
How important is having total control over your business to you?
What do you know about your IR35 status? If you have contracts that do not fall within IR35 and you are the limited company can be an advantage tax-wise.
What do you think of administration? Tax returns and dealing with accountants and tracking payments can consume a lot of time. If you’re not having enough time and aren’t working to the highest of your ability An umbrella company might be the right choice.
What length of your contracts? The longer-term contracts are the best for small businesses, whereas many of the shorter ones work better for umbrella companies.
