If you’re looking to work as a contractor, but you don’t feel that it’s the right time or that you’re ready to start your own limited company, then you might be considering using an umbrella company for your payroll service. For many contractors and freelancers, using an umbrella company as their PAYE payroll provider can be a quick and simple method of getting paid.
Umbrella service companies essentially become your employer, paying your salary minus necessary deductions such as tax and National Insurance Contributions. This type of service makes getting paid far easier while massively reducing the amount of administration and paperwork you would need to deal with. Furthermore, an umbrella company can be used for any length of contract and is suitable for contractors working in either the public or private sector, making it a very flexible option.
However, using an umbrella company is not the most tax efficient way to work as a contractor, while there are types of contractor or freelancer who might be more suited to using an umbrella company and may get more out of it than others.
By and large, an umbrella company will be useful for first time contractors who are just setting out in the world of self-employment, either to get a feel for freelance work or to establish themselves long-term. Such contractors may not be considering establishing their own limited company, or may be planning to in future, and may currently be more suited to working under an umbrella company.
As such, umbrella companies are more likely to be suitable for contractors who are earning a lower rate for their work, such as under £15 per hour, and who are working on shorter assignments or contracts, i.e. assignments lasting three months or less.
Finally, contractors who have been told by their agency or end-client that they are inside IR35 should seek an umbrella company for their payroll requirements.
