As an increasing number of freelancers turn to umbrella companies in the wake of the new IR35 rules for private sector businesses, many will be entering a form of unemployment completely different to what they’ve become used to.
While working through an umbrella company is, in many ways, simpler than being self-employed, there are still elements that freelancers will need to be aware of beforehand and adjust to once they’ve made the move.
Joining an umbrella company means that the person becomes a legal employee of the company. As a freelancer joining an umbrella company, you can still retain your previous clients, but they will now be charged for your work by the umbrella.
The umbrella company then pays you via the standard employee Pay As You Earn (PAYE) system, with National Insurance contributions (NICs) and income tax deducted. The take home pay that a freelancer receives from their umbrella company will also be subject to fees charged by the umbrella for their services.
At this juncture, it is important to point out that umbrella companies offering freelancers the chance to avoid income tax or NICs or offering take home pay of 90 per cent or more are almost certainly operating a tax avoidance scheme and should be avoided.
Aside from the above, there are several ways to spot non-compliant umbrella companies. The quickest and most efficient way to ensure that an umbrella company you are considering joining is legitimate is to check whether they are accredited by a body such as the APSCo or the FCSA.
While freelancers need to be wary of umbrella companies offering “benefits” such as lower tax or higher take home pay, most legitimate umbrellas will offer a variety of completely legal benefits in order to attract freelancers. These could range from rewards programmes and voucher schemes to health benefits or counselling services.
Finally, self-employed workers who join an umbrella company should be aware that they will be unlikely to able to continue claiming things they may previously have put down as expenses, such as travel.
Author: Steven English
27.08.2021
