An umbrella company is an organisation, similar to a normal company that acts as an employer to Agency contractors. Although most IT contractors tend to set up their own limited companies, a significant amount often decide to work through an Umbrella Company. Although ‘freelancers’ can trade in many different ways, for contractors the choice is much smaller. Contractors work on fixed term contracts with end clients, and due to industry and employment status conventions, the contract is almost always signed between the client and another company. This company being the contractor’s own limited company, or an umbrella company.
It is usually done through recruitment agencies who issue the contracts to a limited company as the agency liability would be reduced. It then issues invoices to the recruitment agency or the client who, once the client pays the invoice, will generally pay the contractor through PAYE with the additional benefit of offsetting some of the through expense claims for example travel, food etc.
Basically, comparisoncontractor operate as vessels for handling the masses of administration and paperwork that normally accompany anything to do with freelancing, and by doing so, allow their contractor members to concentrate solely on contracts.
The umbrella company will act on behalf of their freelancers organizing invoices, requesting and collecting payments and calculating their tax returns, before transferring the adjusted amount to the freelancer’s bank account. By doing this, the company lets the contractor or freelancer work their contract as per normal, but once a month or once a week depending on the company, they will submit time-sheets and expenses forms and leave the rest of the paperwork to their Umbrella Company.
One of the key things that attracts contractors to the umbrella company route is that it provides a contractor with the ability to work unhindered by the administrative side or struggling to deal with their tax issues. An umbrella company essentially acts as your employer, for tax reasons, when you agree on a contract with an employment agency or a client. It is an alternative to you setting up your own Limited Company and, if your contract is outside of IR35 it is usually the most cost effective way for you to operate.
So essentially the contractor works for the umbrella company with all contracts signed between the umbrella company and the clients rather than the contractor and the client. As a result, the umbrella company receives the payment for the work and then pays the contractor a salary having taken their cut.
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