Umbrella companies are growing in demand as a result of the impending changes to off-payroll in the private sector (IR35) legislation. However, thousands of contractors who are used to contracting through a personal service company may be asking ‘why use an umbrella company?’ The following tips should help.
Easy alternative to limited company contracting
For assignments inside IR35, there are no benefits to continuing to operate through a limited company. This is because the fee-payer in the supply chain will be required to make the necessary deductions to your salary before sending your net earnings to you. And, with the responsibly for determining IR35 statuses falling on end-hirers (private sector) after April 2021, there is a possibility more assignments will shortly be considered as inside IR35 (although we hope assessments are done fairly).
Umbrella companies offer a PAYE payroll service that can be used while your limited company remains open. You are free to switch between the two as you please. Doing this may be a very easy way to continue operating in the “new world” of contracting.
For more information about the upcoming changes in legislation (off-payroll in the private sector), check out our blog: The Umbrella Company Checklist For Contractors Inside IR35.
Temporary
Umbrella companies can be used for as long as you want and their margin only applies when they pay you. Hypothetically, you could switch between limited and umbrella every week if you wanted – although it may get rather stressful!
We understand a majority of contractors want to work outside IR35 – to maximise pay retention. Umbrellas are ideal for contractors inside IR35 and can be used while you look for new contracts outside IR35.
Compliance
Umbrella companies process their employees’ payroll following HMRC’s tax system – Pay As You Earn (PAYE). This ensures every employee pays the correct amount of tax and National Insurance Contributions. Umbrella companies will ensure your mind is put at ease and you remain compliant with UK tax law.
Please note: While most umbrella companies in the UK operate compliantly, one or two may be unethically encouraging tax avoidance. Tax avoidance schemes are evil and could land you in serious trouble. For more information, read our Tax Avoidance Schemes page and our blog: HMRC Issue Warning In New Corporate Report Covering Marketed Tax Avoidance Schemes – “Please Be Vigilant”.
Easy to use
Using an umbrella is easy. Once you register (usually takes 10-15 minutes), all you need to do to be paid on time is complete timesheets and submit them to your umbrella and recruitment agency. Each time the umbrella pays you, you’ll be sent a payslip. There is no tie in period, and you’re free to join and leave as often as you want. There should be no joining or leaving fees.
Employee rights
By registering with an umbrella company, you become their employee. As a result, you’ll have access to Statutory Employee Benefits, including Sick Pay and Maternity/Paternity Pay.
Competitive marketplace = little extras for contractors
As more and more contractors find themselves inside IR35, the number of umbrella companies in the UK has risen. Therefore, there is a lot of choices out there. This means that umbrella companies are frequently offering little “extras” as a way of trying to entice you to use their service. Compliant extras may include employee discount schemes, discounted margins, periods for free, referral promotions (if you tell your friends), and more.
Conclusion
Hopefully, we’ve helped answer: why use an umbrella company? Umbrella companies are an easy way to get paid as a contractor. You won’t be able to benefit from a combination of dividends and salary – because umbrellas operate PAYE – making them ideal for contractors working inside IR35. Understandably, most contractors will want to work outside IR35, but know that umbrella companies are there as a solution to being inside IR35 – for as long as you need them.
Top 10 umbrella companies
If you’re interested in using an umbrella company, why not check out our top 10 umbrella companies? Each one is accredited by the FCSA – the UK’s leading professional body dedicated to ensuring the supply chain of temporary workers is compliant and ethical. And, some of them have amazing offers at the moment.
