For the majority of people who want to work as contractors and freelancers, stepping into the world of self-employment can seem an incredibly daunting prospect. It’s true that it offers an opportunity to stay away from the monotonous 9 to 5 work schedules, and take charge of all the responsibilities making them their own boss, but it comes with several challenges. Before starting their own business, people have to gather the courage to kiss goodbye to standard employee benefits and financial security as well.
However, umbrella companies offer something a little bit different. By turning contractors and freelancers into regular employees and then contracting their services out to the end client, an umbrella company provides them with the same freedom of being their own boss, while also offering much greater financial security and reducing many of the risks involved with self-employment.
The latest ONS figures show that there are currently just over 5 million self-employed workers in the UK, accounting for around 15% of all working professionals. Of those 5 million professional contractors, freelancers and sole traders, approximately 14% are operating under an umbrella company. But why should contractors consider joining them?
It’s so easy to get started
An umbrella company provides the perfect first step for those just getting started with contracting, as well as those working on short-term projects or earning under £15 an hour. Not only does it reduce the high levels of financial responsibility, umbrella employment is also remarkably simple to set up.
Instead of worrying about the stress of running a company, working through an umbrella company is ideal for those who remain unsure about contracting in the long-term. Since a contractor only needs to sign up with the company and then submit timesheets to get paid, this is by far the easiest method of self-employment-with the best umbrella companies offering seamless same-day setup.
No more worrying about financial paperwork
After signing up with an umbrella company, a contractor is then considered an employee of that company. Ultimately, this means they will be paid via PAYE just like a permanent member of staff and, perhaps more importantly, they no longer have to worry about any financial admin.
Whereas other forms of self-employment involve keeping track of tax deadlines and submitting confusing paperwork, umbrella companies do all the hard work for contractors and freelancers. After calculating their tax and National Insurance contributions, an umbrella company will automatically deduct this amount from their pay, as well as the margin charged for their services.
Claim expenses and tax relief
Although the tax benefits of limited companies are undoubtedly much greater, contractors can still claim expenses and tax relief when working through an umbrella company. However, they always need to make absolutely sure they have kept hold of all the relevant receipts, and the expenses they are claiming are allowable.
HMRC’s strict guidelines determine exactly what a contractor can claim expenses for, but even this will be completely dependant on their own circumstances. However, so long as they’re genuine, unavoidable business costs incurred during a job, they can typically claim expenses on things like travel, equipment, and professional certifications.
Contractors still receive statutory employee benefits
The lack of sick pay, annual leave, maternity pay, and workplace pension is always considered a major drawback of self-employment, with 47% of contractors claiming that an overall lack of security is the biggest challenge of working for themselves. But when working under an umbrella company, they are entitled to the same statutory benefits as a regular employee, while also enjoying the same freedoms as other contractors.
Contractors can focus on doing their job
Working through an umbrella company means contractors don’t have to worry about breaching any modern tax laws or getting paid on time. Instead, they can simply focus on doing what they do best: their job. Instead of attempting to calculate their taxes, submitting paperwork or registering a business at Companies House, they can free up a significant amount of time and ultimately improve the quality of their work.
Since the average self-employed worker only comes away with £240 a week (compared to £400 made by permanent employees), this is the perfect solution for those wanting to dip their toe into the world of self-employment, without taking the risk of committing to it full-time. Either way, joining an umbrella company is undoubtedly the easiest method of working independently, although some may find it more financially beneficial to eventually set up as a limited company instead.