Working as a contractor can be tricky.
You’re really good at what you do, but all of your jobs are temporary, so you’re always looking for the next one.
But so too are lots of other contractors, and they’re competing for all the same jobs as you.
And let’s not forget that not only are you doing a job, but as a contractor you’re running a business.
You need to keep track of all your incomes, your expenses, keep track of your work diary so you aren’t double booked, and even occasionally have to deal with slow- or non-paying clients.
As a contractor, you never truly have time off, because you’re always planning how to find the next job, and building relationships with your clients.
That’s where umbrella companies come in
Umbrella companies exist to try to make the life of a contractor simpler and easier.
How does an umbrella company work?
Though you’ll continue to work as you always have done as a contractor, an umbrella corporation will act as your employer.
The recruitment agency you use to find contractor work will sign an agreement with your umbrella company.
You’ll have to complete timesheets, recording all the hours of work you do over the week or month, and then send them to your umbrella company and recruitment agency.
The umbrella company will invoice the recruitment agency, and then pass the payment onto you.
Just like a normal employer, they’ll pay you under the PAYE scheme, sending a payslip with income tax and National Insurance automatically deducted.
What’s in it for the umbrella company?
Of course, the umbrella company isn’t a charity.
They’ll take a fee from each of your payments. The fee will be agreed when you sign up with them, and will be part of the contract.
Should you use an umbrella company?
There are reasons for and against using an umbrella company as a contractor.
If contracting is only a short-term thing for you, you might want to use an umbrella company.
It will save you the hassle of all the paperwork, and you’ll avoid having to set up a limited company only to stop working as a contractor a few weeks later.
If, on the other hand, contracting is going to be permanent, deciding to not use an umbrella company, and instead setting up a limited company, will give you more freedom.
What about tax and paperwork?
If the idea of having to sort out all your tax and paperwork seems like a big problem to you, you still don’t need an umbrella company.
Using an accountant
A good accountant will know all about the rules regarding contractors, such as IR35, and will be able to help you with bookkeeping, paying tax, and everything in between, meaning you’ll face less hassle and will be able to get on with the work you’re good at.
A good accountant will even be able to give you business advice to help you grow, and make you more tax efficient to save you money.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.