An umbrella provider is a company that contractors can work through rather than setting up their own limited company.
If you are a contractor or considering contracting in 2024, you may be wondering how exactly an umbrella company works and why you would choose this route.
To help, Umbrella Search has put together our complete guide explaining how an umbrella company works so you can see if this is the best option for you.
What is an umbrella company?
Let’s start by looking at what an umbrella company is.
As we have mentioned, an umbrella provider is a company that contractors can choose to work through, rather than becoming self employed and setting up their own limited company.
When a contractor chooses to work with an umbrella company, the umbrella provider becomes the contractor's employer and will act as the intermediary between the contractor and the client.
This means that the contractor still has the freedom to choose which clients they work with, what contracts they take on, as well as when they take on work, so they still maintain complete freedom over the day to day lives and career.
However, the umbrella company will deal with the administrative and financial side of working with the client. For example, the umbrella company invoices the client and pays the contractor a salary, deducting tax and National Insurance owed. They will also deal with any paperwork, and ensure that the contractor has the correct types of insurance.
What’s more, they will ensure that the contractor receives statutory benefits, which include paid holiday leave, sick pay and maternity and paternity leave.
Why choose an umbrella company?
There are many reasons a contractor might choose to work through an umbrella company.
New to contracting
One reason a contractor might opt to use an umbrella company is if they are just starting out in the world of contracting. After all, signing up to use an umbrella company is a lot quicker, easier and simpler than setting up a limited company.
Likewise, if you are only planning on contracting for a limited amount of time, using the services of an umbrella company can come in handy, again avoiding the requirement to set up a limited company.
IR35
Another reason that contractors choose to work through an umbrella company is to avoid infamous IR35 legislation.
Signing up to use an umbrella company automatically exempts contractors from IR35 due to the fact that the umbrella company acts as their employer. This means no worries or headaches over IR35.
A helping hand
An umbrella company is there to act as a helping hand for the contractor, taking the stress and hassle out of contracting.
The umbrella company takes care of paperwork and admin, including things such as processing your expenses and invoicing the client.
Whereas contractors that choose to work through a limited company will be tasked with running a business, dealing with the client, handling all aspects of finances as well as getting on with the contract at hand, umbrella company contractors can pass this all on to the umbrella company.
The umbrella company will also ensure that the contractor has the correct levels of insurance they need to carry out the contract at hand. Contractors are legally required to have certain types of cover, and some contracts may require further cover, but thankfully the umbrella company will ensure that you have everything in place.
Take care of tax
Another benefit to umbrella company contracting is that all your taxes are taken care of.
When the umbrella company pays the contractor their salary, they deduct the correct sums of tax and National Insurance in line with current pay-as-you-earn tax bands, meaning that the contractor is always up to date when it comes to their taxes.
This also means no tricky and tiresome tax calculations for the contractor.
Statutory benefits
As we have mentioned, when a contractor operates through an umbrella company they become eligible for statutory rights due to the fact that they are an employee of their umbrella company.
This means that contractors receive at least 5.6 weeks’ of paid holiday leave each year, receive statutory sick leave, maternity leave and paternity leave.
How does an umbrella company work?
Now you know what an umbrella company is, and the many benefits to operating through one, the next step is to understand how an umbrella company actually works.
Thankfully, it's very simple and easy to sign up.
The first step is to find an umbrella company that’s best suited to you. There are plenty of umbrella providers out there and so it can be tricky to know which will serve you best, but don’t worry, Umbrella Search can help with this.
Once you’ve found the perfect provider, you will enroll with the company and then you’re good to go. Once you’re set up, the umbrella company will be there at all times to help and guide you should you need any assistance, help or support.
In return for the range of benefits, services and help that the umbrella company provides you, contractors will pay a fee. Although fees differ from company to company, the good news is that umbrella company fees are competitive. You can read more about umbrella company fees and how much you can expect to pay in fees here.
Now find the perfect umbrella company
As we have mentioned, there are plenty of umbrella companies out there, so it can be tough to know which one you should work with. After all, you want to find a provider that best suits your needs.
That’s where Umbrella Search can help. We will work with you to determine exactly what you’re looking for from an umbrella company, before doing the due diligence and research to provide you with a list of companies that are best suited to you.
To see how we can help, and to take the first steps to finding your perfect umbrella company, just get in touch with Umbrella Search team today.
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