Let’s face it, no-one likes dealing with the Inland Revenue. It’s especially the case for contractors and freelancers, who are also subject to the dreaded IR35 tax rules. You could always run your own limited company in order to get around it, but that’s a lot of hard work. Fortunately, there is actually a way around this, and it comes in the form of umbrella companies. You can sign up with an umbrella company and they will act as an intermediary, which means you still get your money but you’re no longer subject to IR35.
How it works
You sign up as an employee of the umbrella company, and they sign a contract on your behalf with the end client – after you’ve agreed to the terms of the contract. You then submit your expenses and time sheets to the umbrella company, who invoice the client. They’ll even sort out your tax and national insurance contributions. You pay only when you’re working and you can end the contract at any time with one week’s notice. When your contract with the end client ends, you can either continue with the umbrella company for free or they’ll send you your P45.
As well as sorting out all your tax headaches, umbrella companies come with other benefits as well – in fact, most of the benefits of being someone else’s employee, while still working for yourself. They’ll do health insurance, income insurance, mortgages and even pensions. They’ll also cover various liabilities – which they won’t charge you for. Fantastic! I hear you cry. But what if I fall ill?
Sickness and holiday pay
Umbrella companies will retain a small percentage of your monthly pay to create a fund for holiday and sickness pay. And, if you don’t claim any of it, they’ll pay you the whole fund as a lump sum at the end of your contract.
Ah, but what are the start-up fees? Well, depending on the service you chose, there might not be any. Okay, you ask, but what about the umbrella company’s fees? Of course they have to make their money somehow. Does 3% sound good? I can still hear you hesitating. Fine. How about if the company capped their costs to you at £25 per payroll? Oh, and they have two payrolls a week, so if you miss one you can catch the other.
Okay, you can submit all your expenses online, you get a Personal Account Manager to help with your queries, and they will answer all emails within four hours if sent between business hours. All invoices are sent to the end client by email to avoid delays. They will even provide reference letters for financial institutions for you.
Contracting in the UK is supposed to be about having the freedom to work for yourself, so why spend hours on tax that you could be spending working (or relaxing, for that matter…)? Why would you subject yourself to IR35 when you don’t have to? If you pick the right umbrella company, you can kill two birds with one stone and get a whole load of benefits to boot.
I don’t know why you’re still reading.
David webster is a trainee accountant who has been interested since he was bought some shares as a kid. He now follows all things financial and trades forex for fun.