What Are My Options?
It can be a daunting world when you’re contracting! What’s more, the first decision you need to decide upon is which is the best business solution with which to work under. You may be considering self-employment, setting up a limited business or becoming an employee of an umbrella company.
There are several ways in which a client will hire a contractor and it’s usually on a business-to-business basis, so there are several ways in which contracts are actually arranged & agreed upon:
1. Direct Contracts – the contract is made between the client company and the contractors’ own limited company or umbrella company.
2. Via Agencies – one contract is made between the client company and the recruitment agency, and another between the recruitment agency and the contractors’ own limited company or umbrella company.
Considerations of Joining An Umbrella Company
Over the past decade there has been a plethora of UK companies setting up and running various umbrella schemes and despite various tax legislation changes the UK market is still continuing to grow.
If you do decide to join an Umbrella Company, you will in effect become an employee of that company’s scheme. The client then pays the scheme once you have submitted your weekly or monthly invoice. You will then receive a salary after deductions for legitimate expenses, national insurance, tax, umbrella fee, together with any other pre-arranged costs.
Although opting to join an umbrella scheme is not as tax efficient as a limited company it does represent a virtually “hassle-free” way of getting straight into contracting and testing the water. As a contractor, you may be uncertain as to how long a contract will last so the Umbrella option may well be a quick win solution without the need to do any formal administration.
If however, your contract work is subject to IR35 tax legislation then the benefits of setting up a limited business are vastly reduced and using an umbrella company may well be a better option.
During 2000 the Government decided to clamp down on the practice of contractors disguising employment, for instance, a worker may leave his job at the end of one month, only to go back to the same job the following month, but as a limited company contractor, thereby enjoying the tax benefits of a limited structure but really working as an employee. Rules were further complicated following “off payroll” changes implemented in 2017 which forced the public sector to be responsible for determining the IR35 status of contractors.’
So if your contracts are likely to be in the public sector then most public sector clients now insist that contractors use an umbrella company.
Some Other Considerations
- Are you experienced in contracting or a first-timer? If you’re just starting out in the world of contracting then it can be a daunting and confusing time with a lot of changes coming at you all at once. Many newbie contractors find it much easier to take the route of using an umbrella company, which means much less administration until they get used to contracting and feel confident that they are going to remain as a contractor. What’s more in most cases its usually possible to change your setup mid-contract, so you can always move to a limited company setup, or go back to standard employment if you feel the need.
- Is contracting a long-term career move or a one-off between permanent roles? There are tons of administrative and legal duties involved in being a Director, not to mention the plethora of paperwork which needs to be completed for a limited business. If you only plan to work one or two short-term contracts before returning back to being a permanent employee, retiring, or emigrating, then umbrella contracting would be ideal.
- In addition to your contracting work, just how much administration are you willing to do? As an employee of an umbrella company, the administration is quick and very simple. All you need to do is to get your timesheet signed off by the client and then send it on to the umbrella company. You will, however, pay a small fee for the umbrella company to do your administration.
- How much will you be earning? For lower paid roles then an umbrella company is usually always the best solution. However, the advantages of setting up a limited business become a lot more lucrative, especially for higher rate taxpayers.
If you’re still unsure whether our services are right for you or your business and you would like to discuss the matter further, then why not contact one of our friendly support team who is here just waiting to help.’