A few years back there were a number of different ways for contractors to manage their money, but thanks to recent changes in legislation, these days there are really only two options – limited companies or umbrella companies.
Umbrella companies are limited companies that employ contractors and handle all contractor accounting.
This service includes all your PAYE payroll, pension schemes, invoicing, and National Insurance Contributions.
Using an umbrella company can save you creating your own limited company, hiring an accountant, or dealing with HMRC.
When joining an umbrella company, you're handing over all accounting to a third party. This frees up your time to focus on the jobs and day-to-day work. This frees up a lot of time, so naturally lots of contractors sign up.
The type of responsibilities that an umbrella company will handle include:
However, there are other benefits for joining an umbrella company. One major benefit is being freed up from any risks or legal issues to do with limited company contracting - including IR35. You will also benefit from employment laws including holiday and sick pay - as well as maternity or paternity leave.
You can find out more from in our article about what do umbrella companies offer?
There are some contractors who earn in excess of £300 per day and prefer handling paperwork themselves. The major benefit for owning your own limited company will be more expenses and flat rate VAT schemes.
However, more recently contractors are making the switch to umbrella companies. There is extra flexibility given to you as an employee that wouldn't be granted as an employer. You can choose to work short periods, on and off, or go away and come back again whenever you please. This can be difficult if you're a limited company.
To join an umbrella company, start with a simple phone call, email or a form to the chosen company. Afterwards you will need to sign an employment contract between the umbrella company as ‘employer’ and yourself as ‘employee.’
The contractor then starts working as normal and at the end of each week (or month), they sign off a time sheet by the people contracting them. This sheet is then sent to their employer.
It will then fall down to your umbrella company to take care of invoicing to the client, collecting the money, deducting your claimed expenses and their National Insurance Contributions, before making payment via PAYE payroll.