Why You Need an Umbrella Company

Becoming your own boss as a contractor or freelancer is your opportunity to provide for yourself with your own business. Working for yourself has many upsides, but there are downsides as well – especially in the arena of taxation and reporting. Working under an umbrella company offers the contractor the tax help and solutions needed to run a business smoothly and in compliance with tax law.

What is an umbrella company? It is an established company that operates as an overarching entity with multiple contractors within its organisation. Individual contractors work under an umbrella contract provided by the company while still doing their own freelance work on their own. The umbrella company handles invoicing, accounting, taxation, National Insurance payments, and allowable expenses. The contractor is paid for each job minus all the necessary deductions. An umbrella company essentially provides complete accounting services so the contractor or freelancer does not have to hire a separate accountant.

Umbrella Companies and HMRC

Facilitating payments to contractors and freelancers through an umbrella company is set up much the same way as a traditional employer/employee payment system works. Under the umbrella contract, payments are made through the government's Pay As You Earn (PAYE) scheme. Contractors are issued a pay statement for each job accepted under the umbrella. This statement explains payment for services, deductions made by the umbrella company and any other statutory payments. It should also include information about the umbrella company's fees and charges

The law requires umbrella companies to follow all HMRC rules and regulations regarding payments, reporting, and taxation. All payments from the umbrella company to the freelancer must go through PAYE and must comply with tax law. Be aware that some umbrella companies attempt to add additional deductions that may be unlawful. Before signing an umbrella contract, the freelancer should insist the umbrella company provide full disclosure of all deductions usually applied, and the reasons for each deduction.

Working with an umbrella company is essentially a payroll and tax solution that can save you a lot of time, effort, and expense. Yes, you will have to pay the margin assessed by the umbrella company, but you will not be paying an accountant or investing time in accounting issues that could be better utilised serving customers.