An umbrella company was, until fairly recently, a really attractive option for certain contractors. But, since the change in legislation that took effect from 6th April 2016, which stated that expenses could no longer be offset against tax and National Insurance, they have become significantly less attractive for most.
If you are debating whether or not it still makes sense to use umbrella companies, or indeed are thinking about using one, on this page of The Smart Contractor, we’ll give you some information which should help you reach your conclusion.
How umbrella companies work
Using an umbrella company effectively means that you, as the contractor become an employee of the recruitment agency that places you. You will have a contract of employment with the umbrella company and the recruitment agency will act as middle-man between the client and the umbrella company.
When you have completed your timesheet with the client, the client will approve your hours, pass your timesheet to the agency and the agency will pass it to the umbrella company to make your payment.
The umbrella company will then invoice the agency for the work you have done plus any agreed expenses. The agency then invoices the client who pays the recruitment agency, who in turn pays the umbrella company.
Once the umbrella company has received payment, they then deduct tax, National Insurance and fees and make a payment to you together with a payslip, just as if you were employed.
The downside of using an umbrella company
Although umbrella companies were very popular until recently, legislation around this way of working has changed in recent months, making them much less attractive at the moment.
As you can see from the description above, the umbrella company way of working is hardly lean, but it was attractive at one point. However, in April 2016, changes came into force which means that umbrella companies are no longer able to offset expenses such as travel and subsistence. This means that the tax implications of working this way are no longer as attractive as they were because they mean that less of your hard earned income stays in your pocket.
Although umbrella companies are likely to come up with solutions to overcome this issue, for the time being, the jury is still out for most people about the attraction of working this way.
The best alternatives at this point in time for any contractor, depending on their income levels would appear to be self-employment or setting up a limited company.
Self-employment works well for contractors whose income or projected income is at the lower end of the scale, but in reality the limited company structure is generally going to be more suitable for most contractors. All of that said, there is no general rule of thumb that works across the board, so like most things of this nature, it is best to seek professional advice.
If you’re in a dilemma about how you should set up your contracting arrangements, help is at hand. At The Smart Contractor we have a team of experts who can help you work through your options to ascertain confidently which would work best for you. All you need to do is get in touch.