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Is using an Umbrella Company your Best Option?

For most freelance contractors an umbrella company will be the simplest and most straightforward way to handle their administration while in contract. For the minority of contractors it may be worth checking out the alternatives to an using a contractor umbrella company.

Stephanie Buck, Sales Director of leading umbrella company JMK Group UK, summarises the alternatives to using an umbrella company.

Agency PAYE

This is a popular alternative, for a few contractors, instead of using an umbrella company. In this instance, the contractor would become an employee of their recruitment agency, and the recruitment agency would become their limited company.

• This way of operating in probably the simplest method there is, but also financially the worst for the contractor.

The contractor is not permitted to claim any business expenses, and their entire salary is subject to income tax & National Insurance. An umbrella company, on the other hand, will return a higher net pay amount after all deductions.

This alternative to using an umbrella company, referred to as 'going agency PAYE', may be preferable if your contract is just for a day or two. However, for many recruitment agencies the hassle & administration burden this involves means it's usually just not worth their while to provide such a service to their contractors.

• The recruitment agency is likely to suggest the contractor finds an umbrella company.

Running your own Limited Company

This is the second main alternative to using an umbrella company. Setting up and running your own limited company means you become liable & responsible for the correct administration of the business - in addition to fulfilling your contract on a daily basis.

You will be a director, with obligations and responsibilities for the legal compliance of the limited company. There are many detailed and intricate laws to understand across a wide range of disciplines. Appointing an accountant is necessary and this and other costs must be taken into account.

• Though extremely hard work, it can sometimes be just as rewarding to run your own limited company (though beware of red-tape!) rather than using the easier option of an umbrella company.

Legislation affecting Contractors

An umbrella company acts as employer to independent contractors who work under temporary contract, usually through a specialist recruitment agency.

Recruitment agencies will only issue contracts to a limited company and since the introduction of the MSC (Managed Service Company) legislation in 2007, the only way a contractor can comply with this requirement is to set up their own personal limited company or to use an umbrella company.

JMK Group UK's Stephanie Buck concludes by reminding contractors that umbrella companies are now more popular with contractors than at any time over the last ten years:

• Umbrella companies have become the popular choice for contractors ever since the government introduced the so-called "IR35" legislation in 2000. IR35 makes it less beneficial for contractors to setup their own limited company and relatively more attractive to join an umbrella company.

Visitors who read this article went on to read these articles:

1. HMRC umbrella companies
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3. Ten myths about IR35
4. The best umbrella company.
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written on2010-08-24 12:00:36

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