For many people, being a contractor offers a degree of freedom that they didn’t enjoy in other types of employment. It allows them to concentrate on meeting the needs of their clients, while being self-directed and finding a work/life balance that better suits their needs.
Being a contractor does present a range of challenges, however, when compared to being employed. You need to be able to manage your finances, ensuring that you are completely compliant with tax and invoicing procedures.
While your business remains small, handling these administrative tasks isn’t too difficult, but as your operation starts to grow, they can become more challenging. There comes a point in the development of every contractor business when they need to consider the next step. Do they become a limited company, or is there another option?
Increasingly, contractors are seeing the benefit of working with an umbrella company.
You might have heard of umbrella companies but don’t fully understand what they are and what benefits they might bring. Let’s clarify…
What is an umbrella company?
An umbrella company works as a ‘middle-man’ between employers and contractors. The umbrella company issues the invoice for work undertaken by the contractor, which the client then pays. The umbrella company then pays the contractor’s salary out of the money received, minus any deductions and their own fee. In effect, the umbrella company acts as the contractor’s employer.
While it may seem that the contractor is giving up a degree of autonomy to work with the umbrella company, they are in fact gaining greater freedom from time-consuming and complex financial administration. The contractor’s business has grown to such a point where that administration is taking them away from their core business. Working with an umbrella company allows contractors to re-focus their work back on their core business and better manage their time.
Here’s five of the top benefits of working with an umbrella company.
- Help with your finances
Few people get into business to spend time managing financial affairs unless they’re an accountant. Working with an umbrella company takes away the onerous task of managing your taxes and National Insurance each month. There’s no possibility of unpleasant surprises when the tax bill lands, as your taxes will be deducted every time an invoice is paid. What you receive into your bank account is all yours.
IR35 will no longer apply to you if you opt to use an umbrella company. If you’re a contractor confused by the ever-changing legislative and taxation laws, this can be a great relief. Contractors who opt to work with umbrella companies regain time to take on more work or to relax.
- Gain employee benefits
Working with an umbrella company effectively gives you the same status with HMRC as an employee, while retaining the freedoms of being a self-employed contractor. Your wages will be paid through PAYE and the money you receive will be your own with no need to budget for future tax and NI liabilities.
Research by the Freelance & Contractors Services Association (FCSA) discovered that over three quarters of all contractors do not have any means of paying themselves sick pay, maternity/paternity pay, holiday or redundancy pay.
You secure all these benefits when you work with an umbrella company, giving you extra levels of security and valuable peace of mind.
- Simplify your working life
One of the most important benefits of working with an umbrella company is the simplicity it provides. People often set themselves up in business with the intention of regaining control of their working lives. They hope to be able to determine their own working hours and improve their work/life balance. As the business grows, the administration starts to take up more of their money. There’s more bureaucracy to cope with and before they know it, they’re working more hours than ever before on time-consuming paperwork.
Working with an umbrella company radically simplifies a contractor’s working life. Whole areas of administration are taken care of. There’s no more compliance headaches either.
Your payslip will show you all the money you’ve earned, and any deductions taken for tax, the money will then be paid into your bank account. It’s the perfect option for busy contractors.
- Claim business expenses
As long as you can prove you’re out of the Supervision, Direction & Control (SDC) of your clients you will be able to claim back business expenses you wouldn’t normally be entitled to. This might include expenses for tools, travel and equipment, and the umbrella company will manage all of this on your behalf.
Your umbrella company will have clear, well worked out procedures for dealing with business expenses, and will know precisely what you can and cannot claim. This means you don’t end up incurring costs you don’t need, or don’t inadvertently claim for something you’re not entitled to, resulting in administrative headaches. Typically, you’ll need to upload any expenses claims weekly or monthly.
There may be some administrative tasks still required to claim expenses but with an umbrella company these are radically reduced. You also have the support of the umbrella company behind you to ensure that you’re doing everything correctly.
As well as being a great option for growing businesses, umbrella companies can be a great way to test the water as a contractor. If you’re used to working for an employer, then the shift to self-employment with an umbrella company can be a lot easier. You avoid the financial demands of running your own limited company and there’s hardly any paperwork involved. You have the flexibility to opt in and out of self-employment, and if you feel that it’s appropriate, you can opt to become a limited company at a later date.
Umbrella companies act as a valuable ‘halfway house’, between employment and other kinds of self-employment giving a degree of security while extending flexibility.
Working with a PAYE umbrella company such as One Click Group brings a range of benefits for contractors. Autonomy and security combined make it a great way to work for increasing numbers of people.