Umbrella companies offer a convenient way to trade for many IT contractors. Some contractors either have no wish to, or are unable to, set up a limited company and in these instances umbrella companies are the main alternative. Other contractors may just wish to contract in the short term, perhaps just a few months, which makes setting up a limited company unviable. Umbrella companies became increasingly popular after the IR35 legislation was introduced over ten years ago.
Umbrella companies organise the paperwork on behalf of the contractor, who is employed on a PAYE (Pay As You Earn) basis by the umbrella company – meaning IR35 (and the MSC Legislation) no longer becomes a worry. If you decide to trade through an umbrella company you’ll be able to claim some of your business expenses against your tax (i.e. ‘allowable’ expenses incurred such as travel, meals, and accommodation whilst going about your work) as an additional benefit.
Leaving the day-to-day administration to the umbrella company is a benefit to many contractors who don’t want such distractions from getting the ‘real’ work done. All you have to do is provide your timesheet and details of expenses to your umbrella to get paid. In short, umbrella companies make contracting much easier by invoicing the client, chasing for payment if it becomes overdue, processing your expenses and sorting out your tax and National Insurance contributions.
Further reading on umbrella companies:
A guide to Umbrella companies
A contracting career does not necessarily mean flying entirely solo. For many, umbrella companies represent the ideal balance between the independence of the contractor and the convenience of the employee.
Umbrella Companies and travel expenses
Umbrella companies, by using an overarching contract of employment, do offer a worker continuity of employment and provided the Umbrella is set up correctly this is perfectly legal.
How to choose an umbrella company
Umbrella companies: what should contractors be looking for?
What is an Umbrella company dispensation?
What a dispensation is and why you can only claim for expenses you can prove you've incurred.