What are the benefits of using an Umbrella company?
While the majority of contractors opt for limited companies to handle their business affairs, there are circumstances in which umbrella companies can represent a more practical option. Understanding the benefits that an umbrella company can bring, and matching them against your goals and expectations for your contracting career, will tell you which business model is best for you.
A crucial first step is to be clear in your own mind why you are considering a contracting career – for the independence, the chance to set your own hours and work/life balance, the opportunity to maximise the return on your skills and experience, and so forth. Do you look forward to the challenge of managing your own finances, or will this be an unwelcome distraction from your ‘real’ work? Does the thought of becoming a company director motivate you, or are you more attracted by the opportunity to sample a wide variety of working environments?
With the answers to these questions to hand, you can start to consider the benefits that an umbrella company can offer. The most obvious of these is to save you from having to manage your own tax, NI, payroll and so forth – a major challenge for the first time contractor, even with a good accountant. Operating under an umbrella frees you from the overhead of setting up, and later shutting down, a limited company – ideal if you wish to trial a contracting career before making a long term commitment, or if you plan to work as a contractor for only a limited period.
It is also possible that you may not be able to, or wish to, take the role of a company director, making the option of outsourcing your administration and leaving you free to prioritise your day-to-day work an attractive one. The advantage of not having to take on the tasks that it is hard to budget for, and which in themselves do not generate any revenue, such as chasing late invoices, can also be considerable.
The type of work you expect to be carrying out can also influence your decision. If you expect that most or all of your contracts will be caught by IR35, then there is very little financial justification to go the limited company route as you will still have to pay full PAYE and NI contributions. An umbrella company in this case would definitely be a viable option.
Not least, remember that the decision to operate using an umbrella company is not binding. At any point you could review your business model and opt to switch to a limited company – something not so easy to do in the other direction.
The principal advantage of the umbrella company model is that it gives an alternative route into contracting for those who, for one reason or another, do not wish to or are not in a position to immediately take the plunge of setting up their own limited company. Ensure that you know the full facts about the business models available, and that you are clear in your mind as to what you want to get out of the contracting experience, and you will put yourself in the best possible position to enjoy a rewarding independent career.
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