6 Benefits of Contracting via an Umbrella Company
An umbrella company is predominantly used in the UK by contractors to minimise the impact of the IR35 rules and regulations on the amount of taxes they have to pay to the government. They act as the employers of the contracting companies, and the actual contracts are signed between the umbrella companies and the customers/recruitment agencies, although it’s the independent contracting companies who handle the actual projects. The contractor will supply the timesheets of the project to the umbrella company, which will bill the client/agency in their own name. The umbrella company then transfers the funds to the contractor after deducting an agreed upon fee from the payment, the necessary taxes and fees. Those that have not yet worked with an umbrella company before might not be fully aware of the advantages of doing so. There are many though, as we will discuss next.
It’s Extremely Convenient
Since the umbrella company takes care of everything from collecting payments, to calculating the taxes, contractors find it to be an extremely convenient arrangement. They can simply concentrate on the work itself and maintain the timesheets, because that is pretty much all they are required to do while working with an umbrella company. As soon as they do their job and submit the timesheets, the company then contacts the agency/client for payment, completes all the paperwork and admin work necessary, and processes the payroll within a very short time. The contractors still practically stay independent, but they don’t have to deal with any paperwork or the HMRC.
Taxes Made Simpler
By default, all umbrella companies automatically calculate and deduct the taxes and National Insurance payments that need to be paid to the government, essentially making the contractor’s job easier because they don’t have to worry about paying taxes anymore. Make no mistake, the contractor still pays taxes like they are supposed to, but they need not worry about calculating and paying them on time, because the umbrella company takes care of all that, in the same way any organisation takes care of the taxes by deducting them from the payroll of their regular employees automatically.
There are many umbrella companies, two of the most popular ones are Bradford Jacobs (Europe) and SJD Accountancy, who excel at tax optimisation. What this means is that a company like Bradford Jacobs utilises their vast experience in the field to not just calculate and deduct taxes like most others do, but they actually reduce the total amount of money that a contractor has to pay to the government. They have innovative payroll solutions which they use to help independent contractors save money, while being 100% compliant with all the associated rules and regulations.
It Helps New Contractors to Test the Waters
The business of contracting is not for everyone, and although it can be quite profitable, experience is almost a necessity to see real success. The umbrella company lets a new contractor test their field of work out to see if they can handle it, without the hassles of forming a Ltd. Company right away. This reduces financial impacts, in case things do not go as planned.
Working with Umbrella Corporations Prepares Contractors for Starting their Own Company in the Future
Working with an umbrella corporation also allows the contractor to get acquainted with the taxes, fees, paperwork, admin duties and everything else that comes with running a company. Once the contractor has attained the necessary experience and knowledge by working in the field for a few years, they are free to form their own Ltd. Company, if they wish to. However, it has been seen that most contractors in the UK favour working with umbrella organisations, even after gaining a significant amount of experience, due to the many benefits of the arrangement.
Contractors may qualify for claiming expenses, as long as they have valid ones, supported by associated documents. Some of the basic expenses may not even require documents, although it is advisable to hold on to every bill/receipt. Having the necessary documents will maximise the chances of receiving the maximum possible compensation for the expenses which you had to bear while finishing the project. Once again, the umbrella company takes in all the supplied documents for the claims and processes them accordingly, without the contractor having to worry about any of that.
Keep in mind that there are certain umbrella organisations that may declare that you can actually make profit from expenses claims, while in truth, that is false advertisement. What you claim is part of the cost of operation and getting compensated for necessary expenses is not the same as profiting.
If you are considering contracting via an umbrella company, make sure you know all the facts before jumping in to ensure you reap the most benefits.