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When to use an umbrella company

Want to find out more about the premise of umbrella companies, and when they may be useful to you? Guarantor Loans takes a look at everything you need to know about umbrella companies, and when they can be used.

Umbrella companies explained

Umbrella companies act as the middleman between an agency or company that you are currently working for and the contractor (ie. you). They help to organise a number of different things, but their main responsibility is to help organise you getting paid for work.

How do they work?

How exactly do umbrella companies work in practice then? We take a look at the role of a PAYE umbrella company when it comes to the process of getting paid:

when-to-use-umbrella-company
A graphic showing exactly the role of an umbrella company between a freelancer and the client.

 

  • For the client or agency you are working for, you will most likely be provided with a timesheet in which you will need to log in all the hours that you work for them.
  • As an employee (of the PAYE umbrella company) you instruct them to directly invoice the client or agency based upon the timesheet you have provided. This may be done on a weekly or monthly basis. This will also need to be countersigned by the client
  • At this stage, the client then settles the invoice payment to the umbrella company. This will be when you receive the salary for working for the client
  • The amount you will receive will be your net salary. Any contributions that need to be taken off (ie. national insurance and income tax contributions) will be deducted at this point
  • The last stage involves receiving a payslip from the umbrella company. This will show how your salary has been calculated, as well as any contributions that have been deducted.

When would I use an umbrella company?

As previously mentioned, umbrella companies are most commonly used by freelancers whose main method of employment is through recruitment agencies, as well as freelancers. Clearly, there are other options available to those in these types of employment, so why would they choose to use an umbrella company? Here are some of the possible reasons why people may use one.

If you don’t want to run a limited company

Many freelancers and contractors opt to work for an umbrella company instead of setting up their own limited company. This is because the former is considered to be the main alternative to the latter. Whilst setting up your own limited company can have a number of advantages (the most notable being the potential opportunities for tax relief by being self-employed) it does also mean that the only person who is fully responsible for all your finances is you and you alone. By working for an umbrella company, it is instead their responsibility to sort out how you get paid. Furthermore, as you are an employee of an umbrella company, this means that you do not look after your own payroll as you will be paying national insurance and PAYE contributions.

Furthermore, the tax that you need to pay will not need to be calculated by you, as the umbrella company will be able to deduct these contributions from your pay prior to you then receiving it (source: Transparent Umbrella Company).

To claim for work-related expenses

Depending on the circumstance, it may mean that by working for an umbrella company you will be able to claim for some work-expenses. In the scenario where this is possible, you will need to make sure that you keep all bank statements and receipts you will need to claim these back from HM Revenue & Customs in the future

To have a pension scheme

If working for an umbrella company, you may also be eligible to be a part of a company’s workplace pension scheme, meaning contributions to the scheme are taken out of your salary on a monthly basis. If you are self-employed, creating a pension pot often turns out to be more difficult to sort out and implement, so this can be one less thing to have to consider for many contractors and freelancers.

It is less time-consuming

By not having to think about organising your invoices, how you get paid, as well as not having to take care of paperwork and other administrative duties, it means that deciding to opt to work for an umbrella company can be far less time-consuming than deciding to run under a limited company.

 

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