Contractors who are interested in an alternative to a Ltd. Company may want to consider an umbrella company. Under this arrangement, a contractor can focus on income-generating activities without the hassle of having to deal with the administrative tasks which come with running a business.
The umbrella company will keep track of business expenses and prepares the end of year tax returns. The company also looks after forwarding invoices to clients and processing payments. A certain amount is deducted for tax payable, and the balance is forwarded to the contractor. He or she receives a weekly payment which represents his or her net pay, without having to worry about setting aside a certain amount for PAYE or Class 4 NI contributions.
Benefits of Using an Umbrella Company
The main benefit to a contractor of using an umbrella company is that he or she works with an overarching contract. Unlike an employer/employee relationship, the contractor can offset legitimate expenses paid to run the business and reduce the amount of PAYE and Class 4 NI he or she is required to pay.
Working with an umbrella company means that the contractor does not have to hire an accountant to ensure that his or her business finances are in order. Not all accountants have the expertise required to manage the business affairs of freelancers and contractors and finding someone who has the necessary experience can be a long and expensive proposition. The umbrella company is staffed by people with the necessary knowledge to deal with these matters in an efficient and economical manner.
Umbrella companies also benefit contractors by providing public and employer’s liability insurance cover. A contractor who sets up a Ltd. Company would have to arrange to have these types of insurance in place him or herself.
Working through an umbrella company means that contractors will not be required to file company accounts and annual returns to Company House. The umbrella company ensures that the contractor’s business affairs are complaint with applicable tax laws without the hassle that comes with having to deal with these matters personally by running a Limited Company.
Setting up a Limited Company is not difficult, but it means having to deal with a number of administrative tasks, which while necessary, take time away from running the business. Most contractors are more interested in doing their work than being bogged down in paperwork beyond filling out timesheets on a weekly or biweekly basis. Some people end up doing contract work on a temporary basis in between permanent jobs and in that instance, setting up a Ltd. Company doesn’t make a lot of sense.
A contractor who is interested in working with an umbrella company can get set up very quickly. Once the contractor finds an umbrella company which will be a good fit, the next step is to provide a copy of the contract and his or her personal information. The contractor would then submit a timesheet to the umbrella company at agreed-upon intervals and the company would look after invoicing the client and collecting payments.