Contractor Umbrella Companies What Are They?

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Contractor umbrella company solutions provide contractors with an alternative way of trading to running their own contractor limited company. Many contractors also use them because they are caught by the IR35 tax. Umbrella companies typically provide contractors with an employment contract.

An umbrella is a limited company and employs from hundreds up to thousands of contractors. Rather than a contractors own company dealing with an agency or client, the legal relationship exists between the provider and the agency or client. The umbrella invoices the client or agency, collects payment and then pays the contractor net of the firms fees.

Benefits

Umbrella companies are ideal for contractors that are caught by IR35 who dont benefit from having their own limited company. They also suit contractors with a single short contract between permanent jobs who dont want to set up a limited company.

Umbrella company benefits:

Start work on a new contract quickly, even the same day
Claim business expenses to reduce their tax liability and increase pay
Invoices the agency or client and chases late payments
Requires little input from the contractor, unlike running their own limited company.

Because the contractor is an employee, IR35 and the Managed Services Company (MSC) legislation does not apply.

Umbrella companies how they work

Using a provider is simple. Contractors sign up, often online or over the telephone, and hand over responsibility to the management team.

The umbrella company gets contract paperwork signed by both parties, and the contractor can start work secure in the knowledge that a contract is in place. Each week the contractor completes a timesheet, the client authorises it, then its sent to the provider online, by fax or post.

The company will invoice the agency or client and chase payment if necessary. Once the umbrella has been paid, it will pay the contractor a salary net of the firms fees, income tax and National Insurance Contributions, which the umbrella company pays direct to HMRC. The contractor can claim travel and subsistence expenses, meaning they pay less tax and take home more of their gross fees.

Thus, these solutions are a popular trading option for many contractors, particularly those caught by the IR35 tax legislation.

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