What are umbrella schemes for contractors?
Introduction to Umbrellas
There are two major forms of payment structures for contractors i.e. umbrella company and one person limited company.
This article will focus on features and benefits of umbrella company while drawing comparison between it and limited company.
What is an Umbrella Company?
An Umbrella Company will help you with your payroll. You will not have to bear the cost and hassle of setting up a limited company for payroll processing. You can work via an Umbrella Company and let it do the rest.
Working with an Umbrella Company means
- The contractor will not have to take on the responsibilities of running a limited company.
- The contractor will not have any responsibilities of a director, as is in the case of a limited company.
- Administration matters, accountancy and taxation will not be a concern for the contractor. The Umbrella Service provider will take care of all these things.
- Umbrella Company will invoice the agency or client. The contractor will only have to forward an invoice to Umbrella Company.
- Umbrella company will process contractor pay
Although Umbrella Services varied in the last decade, the 2007 and 2010 legislation has made it clear than Umbrellas only have one viable choice i.e. PAYE Umbrella. Under this payment system, the company will send your payments as salary, paying employer and employee NI on all your income.
Whatever payment structure Umbrella Service offers, it will not affect status of your contract concerning IR35. Even if you are receiving payments through a limited company, it will have nothing to do with IR35. The HMRC will not consider this when reviewing your contractors to see whether they fall within IR35 or outside it.
Nevertheless, PAYE Umbrella system will make the situation look like it is caught by IR35, irrespective of your actual status of contract in regard to IR35. If you are a long-term contractor, you should make the right choices to avoid the IR35 legislation.
Advantages and Disadvantages of Umbrellas
- No need to waste time on setting up and running a limited company. Complete the timesheets and send them over to the Umbrella Company.
- No need to worry about VAT returns, payroll processing and even running spreadsheets. Umbrella Companies will also take care of taxation and company accounts.
- Short-term contractors will not have to spend money on forming a limited company. Similarly, they will not have to waste any money on dissolving such company.
- The contractors will only be using the company for processing transactions- its nature being of a service only. Not running the company can be a problem for some contractors.
- The contractors will not be able to make policy decision or take any risks since they will not be running the company as their own independent business.
- The money is always delayed due to third parties getting involved. Even your bank acts as third party when you process your payroll through an Umbrella Company. However, efficient Umbrella Companies will try to speed up as much possible.
- Umbrella companies may not be the best solution for long-term contractors, outside the IR35. Limited company will be a more tax efficient solution for such contractors.
Umbrella or Limited Company?
Limited company is ideal for contractors outside IR35 and working on long-term contracts.
Short-term contractors will find limited company to be too expensive. Umbrella Company will offer better solutions to such contractors.
To understand it, you can think of your car requirements. If you want to use a car in the long term, you would want to own it so that you can make all the repairing and other decisions about it. Whereas, you will only need to hire a car for a day when you just need it for 24 hours. Imagine buying a car when you only need it for a couple of days, or a week.