What Contractors need to Know about Umbrella Companies

An umbrella company is a business which helps contractors (individuals working under temporary contracts):

• Achieve limited company status

• Turn their timesheets into cash

• Calculate & pay taxes directly to HMRC on their behalf

Contractors usually get their contracts through recruitment agencies, which specialise in temporary assignments and which have a list of the many clients who prefer to engage such workers rather than hire full time staff.

Let your Umbrella Company take the Strain

When a contractor (also referred to as a freelancer worker or temporary worker) uses an umbrella company they become an employee of that umbrella company which then takes care of all the paperwork involved in contracting.

The umbrella company will sign the recruitment agency's contract(s) on behalf of the contractor, invoice the recruitment agency (or in some instances the client directly), collect the money when it becomes due and pay the contractor their net pay directly into their personal bank account.

• When a contractor operates through an umbrella company they may be able to claim certain business expenses, which could help them reduce their tax bill, and so take home more money compared to working directly through a recruitment agency.

All compliant umbrella companies work within the same HMRC guidelines when calculating what tax the contractor should be paying, and most umbrella companies will request receipts from the contractor for any business expenditure they may wish to claim for.

What do you Get?

Umbrella companies charge a weekly fee (or monthly fee, if that is the frequency of the timesheet) in return for:

• Enabling the contractor to have limited company status
• Entering into contracts on behalf of the contractor
• Raising invoices to the recruitment agency based on completed timesheets
• Keeping proper records of all transactions
• Taking care of PAYE, NIC & VAT tax requirements
• Ensuring the correct net pay is transferred to the contractor's personal bank account

This means the contractor can get on with what they know best and is not stuck for hours, each week, completing complex official forms & spreadsheets.

Expert Back-UP

It is really important that contractors only claim for business expenses which have actually been incurred and which also comply with HMRC rules.

If the contractor is in any doubt then they should consult their umbrella company for expert guidance. The better, and most reliable, umbrella companies will be able to give the contractor such advice and will have in-house professionals to answer their questions.

Top Tip

Another useful tip for contractors is to avoid umbrella companies which charge a percentage of the invoice total. Instead, pick an umbrella company which has a flat weekly (or monthly) fee.

The contractor will be better off paying a set fee in most cases and, after all, the umbrella company does the same amount of work however they charge.