Four reasons to look again at using an Umbrella Company

In simple effort vs reward terms, the inconvenience of setting up or continuing to run a limited company to handle their personal and professional finances might outweigh the financial benefits post April 2020.

After all, you could spend a lot of time and money on getting an apparently legally-sound IR35 contract drawn up for your clients to sign. But in the end, your client will err on the side of caution and declare your involvement with them as within IR35 anyway.

It’s no wonder then that the use of “IR35 safe” umbrella companies are being re-evaluated. Umbrella companies are considered the perfect vehicle of contractors caught by IR35 to invoice through because the employment status of the contractors it works with is employed (and thus they pay tax via PAYE).

Contractors and freelancers using umbrella companies are the employees of their umbrella. They can continue to work on various assignments for different clients. Much as they would through a limited company. In reality then while their employment status changes, their ability to act as a self employed contractor doesn’t.

Yet IR35 isn’t the only reason why Umbrella Companies are on the up. In fact the umbrella company vs limited company debate has been swinging in favour of umbrellas for quite some time. Ever since the dividend tax credit was abolished on the 6th April 2016, the financial advantages enjoyed by limited company contractors have diminished greatly.

While contractors can still keep more money using a personal service company than they can as an umbrella company employee. It’s important for contractors to really question whether this marginal additional amount of take-home pay is actually worth the extra administrative effort. Especially in the light of the change to the IR35 rules and HMRC’s increasing activity in finding and penalising contractors who inadvertently fall foul of these complex rules.

In this article, Umbrella Supermarket examines four of the main reasons behind why experienced, limited company contractors are looking again at their financial set-ups.


1.   You benefit from a wide range of employment rights

Under current UK employment law, contractors using umbrellas enjoy many statutory UK employment rights protections. Including protection from illegal wage deductions, from unlawful discrimination, and from reprisals caused by whistleblowing. You also have the right not to work more than 48 hours a week (plus the right to opt out of this protection), the right to statutory minimum paid holidays during the year, and the right to benefit from the minimum rest break length.

You may also benefit from statutory maternity/paternity/adoption leave, statutory sick pay, and shared parental pay. You can find out more on the Government’s website about the employment status and rights of “workers” by clicking here.

Although the rights of “workers” are not as comprehensive as standard full-time employees, the protections you receive as an umbrella contractor as much greater than the protections a contractor using a limited company receives.


2.   You have access to a pension scheme

Because you’re an employee of an umbrella firm and by definition an employed “worker”, your umbrella firm must offer you access to the Workplace Pensions Scheme. Anybody working for an umbrella company must be given equal access to the same pension contribution scheme rights as a standard employee and, if you wish to join a pension scheme, your umbrella firm most enrol you into one.


3.   Your umbrella takes care of all pay-related paperwork

Umbrella contractors never have to worry about working out their income tax and National Insurance submissions every month. Your umbrella company manages all payroll on your behalf and the taxes which you incur are deducted from the payments you receive every month to be transferred the HMRC’s PAYE department by the required time during the following month.

Your umbrella company will provide an itemised breakdown of each payment made to you compliant with the terms of the Employment Rights Act 1996 (Itemised Pay Statement) (Amendment) (No.2) Order 2018. Your payslip will show an exact reckoning of the money that you’ve earned and the deductions that have been made.

With most umbrella companies, you simply submit a timesheet and any expenses information every week. The information contained on both is then used to calculate how much you’ll actually take home and receive into your bank account each month. You don’t have to send invoices to clients, chase payment, or process payroll information via a third-party provider – your umbrella does all of this for you.

As an added bonus, just like a normal employee, there is no self-assessment to complete and there are no limited company accounts to submit to Companies House or CT600s to HMRC.

Another major benefit of being paid through an umbrella company is a joined-up financial record which can then be used as evidence that you can successfully service a loan, mortgage, or other credit facility. It’s much easier for lenders and brokers to process a series of payslips than it is to determine affordability by interpreting separate personal and limited company accounts.


4.   You’re able to claim back travel and subsistence expenses

Recently, the amount that umbrella contractors and limited company directors working within IR35 are permitted to claim back on travel and subsistence expenses has changed.

However you’re still allowed to claim subsistence charges if you are not supervised, directed, or controlled by the client on the job you’re working on. You can also still claim on travel expenses between sites if you are under a client’s supervision, direction, or control.

Many umbrellas no longer allow their employees to make travel and subsistence expense claims because they are concerned that there is a high level of risk of declaring certain expense claims as allowable. If this is important to you and if you want your umbrella company to claim back travel and subsistence expenses on your behalf, you should check with each umbrella on its individual policies before committing to work with one.

Which umbrella should you choose?

There are hundreds of umbrella companies in the UK right now competing for your business but how do you sift through all of the offers to find the best suited for you and your career? The answer is to start your search through Umbrella Supermarket.

To start your search, please click here.

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