An umbrella company is the simplest way to invoice for your time and pay your taxes.
If we were to describe an umbrella company in one paragraph it would be this:
“Using an umbrella is like having an employer that you take the jobs to. Like being employed, you put in your hours each week or month. Like being employed, the employer pays you less tax for those hours. That’s it, no self-assessment or putting tax to one side for later, what you get is what you can spend”.
What’s an Umbrella?
Umbrellas are called umbrellas because 1000’s of contractors use them as a big blanket to invoice for their work. Each contractor has their own contract with the umbrella, but the actual entity billing the end client for the work is one single Umbrella.
Umbrella Companies are a special type of Limited Company. They have shareholders and directors just like any business, but they are not the contractors themselves. They make their money every time an invoice is paid to the contractor, usually through a % or fixed fee arrangement.
They don’t just do taxes either. Umbrellas offer a range of features such as:
- Free public indemnity and professional liability insurance.
- Payslips to give to prove your income.
- P45s and other useful documents.
Why Umbrella?
Umbrellas are perfect for people that don’t like paperwork because they eliminate most of it.
You don’t need an accountant or to complete a self-assessment (unless you have other sources of income not going through the umbrella).
All you do is submit your time sheet and wait to get paid.
People like umbrellas because they free up their spare time, alleviating one of the main downsides of being a contractor as they don’t need to do much admin work.
But there are other advantages too, for example if your contract is only for 3 months, you might want to choose an umbrella so that you are not committed to having your own Limited Company. This is especially important to contractors with low job security.
Downsides to umbrella?
Umbrellas don’t give you a fancy title like “Managing Director” and often they aren’t the most efficient way to lower your tax bill.
If you’ve got multiple income sources and a Limited Company already for these, often it’s counterproductive to use an umbrella when the income could be amalgamated into your current Limited Company derived income anyway.
