As business owners, contractors should have the freedom to decide who they work for, when they work and which structure to work through. When we say structure, we’re talking about the vehicle from which you provide your services to clients. Arguably the two most common ways that contractors do this is via a Personal Service Company (PSC) or an umbrella company.
For some context and before we go any further, we’ll quickly explain what PSCs and umbrella companies both are.
A PSC is a limited company formed to deliver the services of one individual, who’s usually the only director and shareholder. When working outside IR35 through a PSC you maintain responsibility for meeting your personal and business tax obligations. If your contract is deemed inside IR35, it gets slightly more complex. You become an ‘employee for tax purposes’, which means your engagement is subject to similar tax and National Insurance Contributions (NICs) to that of employment.
An umbrella company, meanwhile, sits between you and your client or recruitment agency. As an umbrella worker, you become an employee of the umbrella but importantly, retain the independence of a contractor. You will have your taxes deducted by the umbrella before being paid, in the same way that an employee is.
Needless to say, there are lots of advantages to PSCs and umbrellas. And with IR35 reform in the private sector closing in, and the task of determining IR35 status to be passed from contractors to the medium and large businesses they are engaged by, the role of umbrella companies, in particular, has been cast into the spotlight recently.
To help you understand the benefits of umbrella companies and in turn, decide if working through one suits you, we’ve looked at the reasons contractors join us here at Parasol.
If you’re worried or stressed about tax and would rather receive your income with tax deductions already made, then working through an umbrella company might be right for you. As touched on above, an umbrella deducts the necessary PAYE and NICs before paying this to HMRC. This means your tax is taken care of, with whatever you’re paid by the umbrella yours to keep.
Umbrella workers aren’t able to claim quite as many expenses as PSC contractors operating outside IR35, but there are still some they can claim, depending on whether your assignment is subject to supervision, direction or control (SDC). Better still, a trusted umbrella company can manage this process on your behalf once you’ve logged them.
When running a business, contractors need to keep a few plates spinning simultaneously - from tax-related matters to marketing their services to sending and even chasing invoices. This can leave you with little time for anything else. If you find yourself in this boat, then umbrella working could be the solution.
As an umbrella worker you can kiss goodbye to invoicing at long last. All you need to do is fill in your timesheet (whether weekly, fortnightly or monthly) and your umbrella will take care of the rest, making sure you’re paid on time. This frees you up to focus on other more important things.
Contractors do not receive employment rights from clients, regardless of their IR35 status. For some, this is a big drawback and can even result in them taking on permanent jobs. As an umbrella worker, you’ll have access to a range of employment rights, such as holiday pay, along with statutory benefits like sick and maternity or paternity pay. You’ll also be automatically enrolled into a company pension scheme, which will prove useful in saving for retirement.
If your contract is deemed inside IR35 then opting to work via an umbrella company instead is seen as a smart choice. Aside from the fact that IR35 doesn’t apply to umbrella engagements (because umbrella workers are employees), the thinking behind this is simple - contractors working inside IR35 are taxed like employees but don’t receive employment rights in return. However, as explained in the point above, an umbrella company can provide you with these should you choose to work through one.
Contractors also work via umbrellas because of their simplicity and the flexibility they offer. You don’t need to form a limited company to work this way, while setting up only takes a couple of minutes, meaning you can start work soon after. It’s why umbrella working is popular among people new to contracting along with those who find themselves in-between permanent roles.
We should also point out working via an umbrella won’t stop you from operating through your PSC on another engagement. For example, if you have two clients, you could, in theory, provide your services through an umbrella for one and your PSC for the other. You can also dip in and out of umbrella working with ease, meaning this way of working offers the best of both worlds - the freedom and flexibility of contracting and the benefits and simplicity of employment.