What is an umbrella company?
As an umbrella company contractor, you are essentially employed by an umbrella company.
An umbrella company is effectively the middle man between the contractor and their client; the umbrella employs a temporary worker on behalf of an employment agency and the agency will then provide the services of the worker to their clients.
It’s worth noting though that an umbrella company does not find contracts for the worker.
All tax liabilities are worked out for you and automatically deducted from your payslip, whereas for a sole trader or limited company contractor, the responsibility of completing a self-assessment tax return is entirely up to them to file and then pay any tax owed.
For more information on how you’ll get paid, you can read our Using an Umbrella Company – Who Pays Me? page.
What are the benefits of using an umbrella company?
As an umbrella company contractor, you will have many of the benefits that come with self-employment, as well as some of the security that comes with permanent employment.
A better work-life balance is something that the majority of us strive for and this is most definitely a highlight for those who choose to become self-employed.
As a contractor you will often find that you are paid a higher daily/weekly/monthly rate compared to salaried employees, yet you will also have the freedom to pick and choose when you work.
Not having to worry about completing a self-assessment tax return
A sole trader and limited company contractor will need to file all of their financial information and pay for owed tax on an annual basis before the 31st January of each year.
As an umbrella company contractor, this is all sorted for you by your umbrella company – they will provide you with a payslip, deducting any income tax or National Insurance Contributions (NICs).
Still entitled to standard employee benefits
As mentioned previously, being employed by your umbrella company means that you’ll benefit from some of the security that permanent employees have. So, unlike sole traders and limited company contractors, you are entitled to statutory maternity/paternity and sick pay, as well as annual leave, which will be calculated based on the hours you work.
Not having to worry about the IR35 legislation
An IR35 status impacts the amount of tax and NICs you pay, as well as whether you are able to claim back on certain expenses.
You either fall ‘inside’ or ‘outside’ of the legislation with the determining factors based on your level of risk, liability and responsibility as a worker.
As an umbrella company contractor this is something you don’t need to worry about, as you are treated the same as a permanent employee with regards to NICs and tax.
For more information, visit our page IR35 and Umbrella Company Contractors.
What about expenses?
In general, an umbrella company contractor cannot claim back on expenses, just as an employee can’t.
However, there may be some situations where it might be considered, for example, say you were asked by a client to travel away from a usual place of work – a company might offer workers mileage/travel costs, as well as a contribution towards their meals while they’re away.
Sole traders and limited company contractors are able to claim back on work expenses, however, it’s important to remember that they are not entitled to other benefits, such as maternity/paternity, sick or holiday pay, whereas an umbrella contractor is.
If you’d like to read more on this, you can take a look at our Umbrella Company Expenses: A Guide page.
We hope you found this page helpful. If you have any questions about umbrella employment, our team of experts are available to answer any queries, so give us a call on 01206 591 000 or email firstname.lastname@example.org.