How do contractors use umbrella companies?
So, you are ready to start contracting, have a contract offer, and have decided that using an umbrella company is the best starting route for you. What do you do next?
Well, it's very simple, and everything can be handled and set up for you by your chosen provider.
The five main steps to getting started are:
- Choose an umbrella company
- Inform your agent
- Sign contract paperwork
- Supply bank and tax details
- Start contracting!
Umbrella companies will ask you to sign their own standard contract between yourself as an individual employee and themselves. This contract will specify the terms and conditions of the umbrella company service under which you agree to work and be paid.
Why do contractors use umbrella companies?
The main advantages for using an umbrella are:
- Avoids hassle of running a limited company.
- No need to be involved with running software, VAT returns, payroll matters, company accounts, taxation, etc.
- For short term contractors, a main advantage is not having the costly process of forming a company and then arranging for it to be dissolved.
Umbrella companies actually employ their contractors, and will therefore hold back a proportion of the contractors money to cover holiday pay, etc., with a view to paying out at a later date.
It is important to clarify in advance, exactly when you will be paid and whether any monies will be retained for whatever reason.
How do you choose a good umbrella company?
Most agencies will recommend an umbrella company. These are usually judged on the quality of service the umbrella company offers both the agency and the contractor. The agency is looking for hassle free options.
Some agencies have fixed policies (preferred supplier lists) for recommendations whilst some agents have "commercial arrangements" with umbrellas. There is no harm in asking the agency why they recommend a particular umbrella company.
The important aspects to consider are:
- Are they tax compliant (avoid 'schemes' at all costs)
- Speed of processing payments
- Can they offer an expenses model (if claimable)
- What are the fees?
- Are they experienced?
Anybody can set themselves up as an umbrella company, without any experience or qualifications, so it is important to know exactly who you are trusting to handle your hard earned money. Most of the quality umbrella schemes are run by qualified accountants.
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