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What Is An Umbrella Company? A Guide For Self-Employed Contractors

Instead of Establishing your enterprise, a self-employed person can choose to work through an umbrella company. But the benefits of operating through an umbrella company rely on the IR35 status.

If you are a self-employed person and are confused about whether to choose an umbrella company, then you have just found the right post. 

In this blog, you will come to know about what is an umbrella company, why work through an umbrella company, how the advantages of working through an umbrella company depend on the IR35 number? So let’s start!

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What is an umbrella company?

Before telling you the benefits of operating through an umbrella company, we will first tell you what precisely an umbrella company is.

A company that can be joined by self-employed persons instead of setting up its own business is an umbrella company.

When a self-employed contractor joins an umbrella, then a contracting umbrella company

  • Starts acting as a negotiator between you and the end client
  • Start dealing with all the accountancy & taxes(administration), handle payroll, and get paid for the tasks you accomplished. You don’t need to take responsibility for your service enterprise.
  • After deducting all the taxes and costs, an umbrella company pays you through PAYE.

Why operate under an umbrella company?

Handling and organizing a new company can be challenging for the new contractors as you would like to establish a new company.

Operating through an umbrella company will ease you by managing all your finances. It will be in charge of keeping a log of your records, filing VAT returns, and managing all the responsibilities you would have as a company director. 

Payroll is processed when it comes to getting paid, and the contractor keeps the timesheets given to the umbrella company. But you would not enjoy the tax efficiency of a limited enterprise if you are contracting through an umbrella company.

Umbrella Company Status (IR35) :

IR53 status applies only to the contracts and not to the contractors. For this reason, they can operate on contracts both inside and outside IR35.

  • Several contractors who perform inside IR53 may choose to operate under an umbrella company to lessen the burden of managing accounts and calculating taxes.
  • A contractor can run his private company even if working on inside IR35 contracts.
  • You can work through an umbrella company and can run your own company at the same time.

Benefits & Drawbacks of working through an umbrella company

The benefits and drawbacks of working through an umbrella company are as follows

Benefits:

  1. The contractors have the freedom to get a workplace pension and any emergency pay (sick pay, maternity & paternity pay, etc.).
  2. The Challenge of managing accounts and calculating taxes is reduced.
  3. Short-term contractors don’t need to set up their own company and deal with all the company directors.

Drawbacks:

  1. You can not enjoy the tax efficiency of your company. You are paid through PAYE, meaning all your revenue is salary, and their membership fees are also deducted from your paycheck.
  2. You don’t have control of your company’s administration.
  3. Not all umbrella companies are agreeable, so examine first before you work through them.

Conclusion

We hope that now you would be clear about what is an umbrella company and what benefits and drawbacks you would have by working through an umbrella company.

Therefore, Use this blog as a guide only and remember that the right decision will depend on the line and situation of your business. Moreover, analyze your business situation from all aspects then make the decision. Even now, you are jumbled up and can’t choose the right option to consult with the experts.

Are you looking for experts to make the right choice for your company? Stop worrying and get in touch with our Qualified Accountants, Bookkeepers, and Tax Experts now, who Compare Services & fees, and Sign Up online in under 3 minutes at AccountingFirms!

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Helen Gallegos

Copywriter | Social Media Expert | Writer | Blogger

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