For many, working as a contractor provides the flexibility and freedom to be able to concentrate on the clients they have to, and maintain a healthy work/life balance. However, there are some challenges associated with working as a freelancer in addition to managing your finances, and making sure that you’re compliant to tax and invoicing regulations.
While you’re operating as a small company, this will be much easier to manage, but as your business expands as it expands, so will your administrative and financial obligations. As you approach this point you’ll have to begin thinking about the next step : should you go with an unrestricted company structure or do you begin working through an umbrella company.
Which option is best for you?
What exactly is an umbrella company?
An PAYE umbrella company functions as a’middle-man that connects employers and contractors. It is also the employer of the contractor and issues an invoice that the client later pays. From the funds received the umbrella makes the contractor’s wages from it, after deducting their own fees and any other deductions that are required.
While it may appear as if you’ve given away a significant amount of flexibility that comes with being an independent contractor initially the truth is that an umbrella business removes a lot of burden of managing the financial aspect of contracting.
They handle timesheets and payroll services, and ensure that tax is paid. You might even be able to get business expenses reimbursed from an umbrella business if the contract you have with your client isn’t subject to the ‘Supervision, Direction and Control’ (SDC) rules.
What exactly does an umbrella business function?
The umbrella company sign an agreement with the final client.
You sign an agreement to the umbrella organization
It is completed regularly, following an agreed-upon amount of working time (usually one 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 gets payment from the client and then prepares your paycheque
The umbrella company you work for pays you a salary with deductions for taxes as well as the umbrella company’s fees as well as any pension contributions
What are the benefits that come with an Umbrella Company?
As I mentioned working for an umbrella company can make you seem like giving up some of the control you once had over your job. Another way to look at the issue is that it provides you with more time to relax and concentrate on your customer.
The benefits that come with joining an umbrella include:
No commitment
You do not have to sign long-term contracts with an umbrella firm (which you may then have to fight to break). In a limited business you are bound to keep working hard and attempting to make your business successful even if you’re struggling along the road. With an umbrella business it is possible to make a change of mind and go back to normal employment after the expiration of your 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. This is a difficult to reconcile when you’re trying to be the best you can at service for your customers. An umbrella company take care of issues with taxes, they also have staff who are dedicated to collecting your invoices, and making sure you are in compliance with the laws on a wide range of employment issues and other issues.
Maintain employee benefits
One thing that can be a drawback of being 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 they are not the only ones) umbrella companies offer sickness holidays and pay as well as pregnancy benefits as well as insurance for professional liability, which makes your life more enjoyable.
What are the negatives?
There are obviously some disadvantages working for an umbrella firm that you must be aware of prior to making your make a decision. They include:
Fees
If you’re looking to earn the most money that you possibly can then working as an umbrella business isn’t the ideal option. While the majority of firms only require minimal fees, they will still accumulate in time. For employees with lower wages, this can be detrimental to financial security.
Less Independence
One of the main reasons freelancers start their careers at all is that they feel secure and be in complete control over their business and their finances. If you have an umbrella organization, you’re dependent on the business to pay your salary and also to decide on taxes and payments for the expenses you incur.
Fewer Tax Breaks
Directors of companies with limited liability are eligible for tax breaks that employees who work for an umbrella company are not. But, many feel that the peace of mind that comes from not worrying about administrative issues is worth the loss of the tax advantages.
How Can I Tell If an umbrella company is the most suitable choice for me?
Before you make the choice to go with either a limited company or an umbrella company, it’s essential to think about your own business and the ways you would like to conduct your business.
There are many options to choose from and they are the best option for different individuals, therefore there’s no easy and quick answer to whether an umbrella company is the right choice for you.
It is important to consider the following before making your choice:
How important is having total control over your business to you?
What is your IR35 situation? If you have contracts that aren’t covered by IR35 the formation of the limited company can be more advantageous fiscally.
What do you think of administration? Tax returns as well as dealing with accountants and tracking payments can consume a significant amount of time. If you’re not able to devote enough time, as well as performing your job to the best of your abilities A umbrella business could be the best option.
What length of your contracts? The longer-term contracts are the best for small businesses, whereas most short contracts are more suitable for the umbrella business model.
