As a contractor, one of the most important decisions you can make is whether to establish your own limited company or work under an umbrella company. Though there are plenty of benefits to contracting under your limited company, a growing number are turning to umbrellas for the simplicity.
We have outlined below what an umbrella company does and why this may be the answer for you.
What is an umbrella company?
An umbrella company is a separate company that acts as an employer for contractors working on fixed term contracts. They also serve as an intermediary between the contractor and their end client or agency. The principle function of an umbrella company is to organise payment for the contractor. To do this they collect the contractor’s earnings from the end client or agency and then pay it onto the contractor with tax, National Insurance contribution and their own fee deducted.
Is an umbrella company best for me?
If you earn less than £25,000 or are on a short contract and don’t intend to stay contracting for long, an umbrella may be the best option for you. Though you may take home less than you would through a limited company, many contractors opt for the simplicity of working under an umbrella.
Contractor expenses using an umbrella company
By claiming all appropriate allowances and expenses you can minimise your tax bill; however, this is not a way of avoiding tax. Receipts should always be kept for all the expenses that you claim. Remember it is you who HMRC will investigate and not your umbrella company, be very cautious of companies who say you do not need to keep receipts and can claim for things you have never actually bought. If you can’t prove it HMRC will view it as tax avoidance.
For a full and comprehensive list of what you can claim, click here. You may also like to read our Guide to Contractor Expenses and take home pay case studies of a contractor who is using an umbrella company and another who’s working through their own limited company.
Support with contracting
Whether you decide to go limited or use the umbrella option, support is available. SJD Accountancy provides umbrella company services to contractors and freelancers through its sister company, Parasol. For more information, you can visit the Parasol website here.