Contractor Umbrella Companies - What Are They?

Umbrella companies solutions provide contractors with an alternative trading solution to running their own limited company or working self-employed as a sole trader. Many contractors use them to avoid IR35 tax issues, because umbrella companies typically provide contractors with an employment contract.

The umbrella is a limited company in its own right and usually employs from hundreds up to thousands of contractors. Rather than the contractor's own limited company contracting with an agency or client, the legal relationship is between the umbrella company and the agency or client. The umbrella invoices the client or agency, collects payment and then pays the contractor net of the umbrella company's fees, which can be anything upwards of £10 per week for each contractor.

Benefits of using an umbrella company solution:

Umbrella company solutions are ideal for contractors are caught by IR35 who don't get any benefits from working through their own limited company. Umbrella companies are also ideal for contractors with a single short contract between permanent jobs who don't want the hassle and cost of setting up a limited company. And some long-term contractors outside IR35 also use a contractor umbrella company for similar reasons.

Umbrella company solutions can benefit contractors by:

- Enabling contractors to start work on a new contract quickly, sometimes even the same day

- Allowing contractors to claim legitimate business expenses to reduce their tax liability and increase take-home pay

- Invoicing the agency or client each time the contractor submits a timesheet and chasing late payments, so the contractor does not have to

- Not requiring the contractor to be a director or to play any part in running the umbrella company or their own limited company.

And because the contractor is an umbrella company employee, IR35 and the Managed Services Company (MSC) legislation does not apply.

Umbrella companies - how they work:

Contractors find using an umbrella company simple. Once the contractor has signed up, which can often be done online and over the telephone, and negotiated their contract with the agency or client, they hand over responsibility to the umbrella company's management team.

The umbrella company will get the contract paperwork signed by both parties, so the contractor can start work secure in the knowledge a contract is in place. Then each week, or month, the contractor completes a timesheet for the client to authorise before forwarding it to the umbrella company online, by fax or post.

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

Thus, contractor umbrella companies are a popular trading solution for many contractors, particularly those caught inside IR35.