Starting out in self employment can seem like a daunting prospect and for many people the idea of taking care of everything, from marketing their services to completing their tax returns, can feel like it will take up more time than actually doing the work their clients engage them for. However, for many, the reality is actually a lot less difficult than they imagined it, especially with a little advice and support from someone who really knows the system inside out.

One of the most important initial decisions to be made is how you choose to structure your business, and this often comes down to deciding between operating through your own limited company or using an umbrella company.

What is an umbrella company?

An umbrella company manages the majority of admin when working for yourself, meaning that you only have to worry about doing your job. Usually you will be offered a contract through the umbrella company, and they will effectively employ you whilst you are working on that contract. You will submit timesheets to the umbrella company and they will invoice the end client on your behalf and pay you as an employee, deducting tax and National Insurance as per the PAYE scheme.

You may be able to claim basic expenses but it is important to be sure that you are only claiming for outgoings that have been incurred wholly and exclusively in the course of completing your contract. Any umbrella company that promises to reimburse expenses without seeing receipts or by allocating a daily rate regardless of whether you actually incur these costs should be avoided at all costs.

The advantages and disadvantages of umbrella companies

Using an umbrella company means that you will have very little admin except for completing your timesheet and keeping track of your expenses. You will not need to worry about dealing with HM Revenue and Customs as your wages will have tax and National Insurance deducted at source and you will not have to chase up payment etc from clients as the umbrella company will do that on your behalf.

However, this level of service comes at a cost, and working through an umbrella company is one of the least tax-efficient ways to operate. Not only do you end up paying the rates of tax and National Insurance that you would as an employee, but you also pay a fee to the umbrella company for the administration that they are undertaking for you. Some companies charge a percentage of your contract fee, which can get expensive if you start to land more lucrative work, but those who charge a fixed fee are usually a better option as it means you can easily calculate what you should be earning.

Some umbrella companies also make bold claims about being able to claim expenses even if you have no receipts and similar ‘money-saving’ schemes, but most similar schemes are disallowed by HMRC, so it is important to ensure that you do not end up using a disreputable company.

Doing a simple search on the company’s brand name will show you what other people are saying about them and you can discover whether they are respected agency within the industry.

If you have any concerns about the legitimacy of any schemes that an umbrella company is using, then you should avoid them at all costs. Whilst they may accept administrative responsibility for dealing with your tax and National Insurance, you could ultimately be called to account for any discrepancies in the way they have managed your affairs. This means that you could be liable for any underpayments should there be any issues with the way that your finances have been handled.

Things to consider when choosing an umbrella company

Some umbrella companies are huge operations which have hundreds of contractors on their books, which means that you might not get the individual attention that you would if you were running your own company and dealing with your finances yourself. Others operate a more personal service whereby you will be assigned a personal account manager who will be familiar with your situation and whom you will be able to contact direct if you have any queries or problems.

Most umbrella companies should have the technology to allow you to submit details of your working hours and expenses online. Some expect you to fax over timesheets, whereas you may prefer to choose a provider which offers the option to complete all your admin online.

Service guarantees can be a helpful way to ascertain whether your fee is worth spending – some companies will commit to responding to phone-calls and emails within a certain time-frame, enabling you to have confidence in the way your finance are being managed and avoiding the chances of being left without the information you need. You may wish to check on the other services that they guarantee to ensure that their offering meets your needs.

If you have chosen to use an umbrella company, there are plenty of options to choose from. The below guide illustrates weekly and monthly prices based on a £250 daily rate, for a variety of umbrella companies. Make sure to do your own research and ask as many questions as you need to ensure to find the right umbrella for you.

  Weekly Monthly
Contractor Umbrella £29.50 £108.50
Giant Group £28.00 N/A
Crystal Umbrella £27.50 £85.00
Atlantic Umbrella £30.00 £89.00
Parasol £27.50 £119.50
Orange Genie £27.50 £110.00
Liberty Bishop £33.00 £132.00

 

How can Nixon Williams help?

Umbrella companies have their place, and some contractors find them helpful when it comes to starting out, or if they are only intending to contract for a short period of time, but they are not the most efficient way of working. We don’t provide an umbrella solution for contractors at Nixon Williams, however if you’re looking to work under an umbrella, our sister company Parasol are an award winning umbrella company. For more information on their services please visit; www.parasolgroup.co.uk or call 0800 4701549.

If you want to have the reassurance of expert advice and support with the admin needed, but also want to maximise your take home pay, then our specialist accountants can help you establish the most financially sound way to organise your business.

For details on how we could help you make a decision, call today on 01253 362062 or email us at jacqui.fairbrother@nixonwilliams.com.