When is it a good idea to work with an Umbrella Company?

A good place to start if you’re new to contracting is with an Umbrella Company. But what are the advantages and disadvantages of working with an Umbrella Company?

In this blog we investigate precisely that, to help you decide which is the appropriate solution for you.

How does an Umbrella Company actually work?

An Umbrella Company develops an overarching contract between itself and you, the contractor. As a result, you are treated as if you were an employee of the Umbrella, with all of the responsibilities that come along with working for a long-term organisation.

When working under contract, your Umbrella Company will bill and collect money from your client on your behalf. They’ll then pay the tax and National Insurance Contributions due, deduct their fee for acting as your Umbrella, and then pay you the leftover amount as your income. Take a peek at our blog for additional information on how an Umbrella works.

What taxes can you anticipate to pay while utilising an Umbrella Company?

As a ’employee’ of the Umbrella, you are regarded a permanent employee of the United Kingdom (UK) in the perspective of HMRC. As a result, you’ll receive a tax code and be required to pay a basic, higher, or additional rate of tax, depending on your income, just like you would if you were employed on a permanent basis..

How much money would you be able to keep after taxes if you hire a contractor?

Your take home pay will be determined by how much you make and hence how much you’re taxed, and the price which your chosen Umbrella Company charges. Umbrellas may usually do this in two ways:

Charge a fixed fee — this is commonly a one-time or recurring amount deducted from your paycheck. Take a look around to see what you get for your money.

Charge a percentage fee — the Umbrella takes an agreed percentage from your income. Traditionally this can be around the 2-8 percent threshold. To be safe, you should avoid signing up for an Umbrella if you plan to make more money in the future.

How Important Is It to Work with an Umbrella Company?

Using an Umbrella Company can be the best alternative for the following reasons:

If you’re just starting out – and you’re finding your feet, then having the protection of employee rights, plus knowing the proper amount of tax is being paid on your behalf from your income may be the perfect solution.

If you’re located inside IR35 – contracting under an Umbrella may be your safest alternative. Take a look at our blog about working inside IR35 and what it’s meant for you and your take home income.

If you’re not going to be earning more than £28,000 pa Then for tax purposes it may be more beneficial to use an Umbrella.

Setting up and dissolving your Limited Company may not be worth the bother if your income and resulting tax savings do not surpass the time period for which you expect to contract. If you plan to contract for less than six months.

If you’re thinking about raising a family in the near future, you’ll be able to take advantage of employee benefits like sick time, holidays, and maternity and paternity leave if you use an Umbrella Company. If you’ll need the security of mat/pat pay, then employing an Umbrella may be the ideal alternative for you.

How do you know if you’re better off creating your own Limited Company?

Every contractor will ask oneself this question at one point in their career, either at the very start, or when they become more established and have greater confidence in understanding the contracting environment. The best course of action is to consult with an experienced contractor accountant who can give you personalised advice based on your unique professional and personal circumstances.

As part of your monthly price, you’ll have the option of either Limited or Umbrella service; if you choose Limited, you’ll also receive free Umbrella service. Depending on the terms of your contract, we can switch you back and forth between our two services at any time.

If you’d like to learn more, check out our blog post on the differences between Umbrella and Limited subscriptions.

What about IR35?

IR35 is a piece of tax legislation introduced by HMRC to identify and stop persons who claim to be self-employed in order to collect the tax benefits exclusively accessible to those who are actually self-employed, when in actuality they are employed. If you’re deemed to be found ‘inside IR35’ then you’ll be taxed as such and lose your tax benefits, and if discovered ‘outside IR35’ you can continue to be treated as self-employed and enjoy the tax benefits available to you.

If you’re contracting through your Limited Company your ultimate client/ hirer makes the final choice on whether you’re found inside or outside. Take a look at our website for more information on IR35 and how SG can serve you.

In what ways may I begin working with an Umbrella Company?

Please register your information with us by clicking on the following link, or completing the calculator (on the right) We will contact you as soon as possible to help you along your path.

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