Is using an Umbrella Company your Best Option

The services of an umbrella company are the easiest to setup and manage, plus cheaper than running your own limited company.

Is Using an Umbrella Company Your Best Option?

That depends, but for most freelance contractors - "Yes". An umbrella company will be the simplest & most straightforward way to handle their administration while in contract. For the minority of freelance contractors it may be worth checking out the alternatives.

Here is a summary of the alternatives if you don't want to use an umbrella company.

Agency PAYE

This is a popular alternative for some contractors. In this instance, the contractor becomes an employee of their recruitment agency, and the recruitment agency becomes their limited company.

• This way of operating is probably the simplest method there is, but also financially the worst for the contractor.
• The contractor cannot 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.

Going 'agency PAYE', may be preferable if your contract is just for a day or two. However, for many recruitment agencies the paperwork & administration 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 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 & 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 the 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.

More Popular With Today's Contractor

The umbrella company service is 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.