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Contractor umbrella companies – A guide to the pros and cons

October 11, 2011

Although most IT contractors tend to set up their own limited companies, a significant number prefer to work through an Umbrella Company.

For contractors who prefer to live without the administrative responsibilities of running a limited company (or perhaps are on short term contracts), an umbrella company could be a preferable solution.

With an umbrella company structure, an IT contractor will work via the umbrella company. All contracts performed will be signed between the umbrella company and the client.

Each week, the contractor will invoice the umbrella for work performed. The umbrella company will then invoice the client for work performed.

The umbrella company will pay the contractor a salary, minus the pre-agreed fee.

The umbrella company will take care of all administrative paperwork, Tax, NI and related tasks. All income tax, and national insurance will be deducted prior to payment.

Alongside the hassle-free benefits of using an umbrella company, many IT Contractors whose contracts fall within the IR35 rules also opt for the Umbrella route.

Choosing an Contractor Umbrella Company – Positives

  • This is a hassle-free route. You won’t have to perform any of the administrative duties associated with running a Limited Company.
  • All accounting and tax calculations are performed by the umbrella company – you don’t need to hire an accountant.
  • Set-up is simple. You join the umbrella company and provide your contract and personal details. Each week (or month), you send your timesheet to the umbrella company who invoices the client. You will then receive your payment, net of all tax an national insurance liabilities.

Choosing a Contractor Umbrella Company – Negatives

  • You will not have as much control over what you do as you would with a Limited Company. You will rely on the Umbrella to process payment efficiently, and ensure that your client pays quickly.
  • If you are keen on running your own business, and demonstrating that you are in control of the day-to-day running of all aspects of your enterprise, then an Umbrella company is not the best option for you.
  • You should choose an Umbrella Company carefully, as you will be entrusting them with your hard earned money. Take recommendations from other contractors and ensure that the company has a proven track record of efficiency.