Those who have a desire to work for themselves will find that the services of an umbrella company are invaluable.  Business owners who use an umbrella company will be able to carry on with business without having to worry about dealing with administrative tasks such as tax and national insurance, which can be time consuming and confusing for those who are unfamiliar with them. 

How an umbrella company works

Those who want to use an umbrella company will have the services of an account manager who will help them through every step of the process.  For administrative purposes, the business owner is an “employee,” even though he or she is still freelancing or contracting.  When work is completed, the details are passed to the umbrella company for processing, usually in the form of a timesheet. 

The umbrella company will then issue an invoice for the time and the work that has been carried out and will be responsible for collecting the money.  Payments are then passed to the contractor after tax and national insurance has been deducted in a PAYE scheme similar to standard employment.

Payments are made from the umbrella company directly into the bank account of the freelancer, though the fees payable to the umbrella company are deducted first.  In addition to payment for work that has been carried out, the freelancer can also make a claim for any expenses that have been incurred as a result of the work.  The expenses that can be claimed should be negotiated before beginning work and should be set out in the contract with the client.  

Choosing an umbrella company

There are many umbrella companies out there, so finding the right one can be something of a minefield.  The basic system of each is the same, but it is a good idea to research each company that is being considered.  The website of each company should clearly state how they operate and how to go about registering with them.   

Ensure that the company will offer an account manager who will be contactable if his or her services are needed.  This gives the contractor a point of contact in the event of a problem.  The company should also be able to clearly explain how they deal with the tax and national insurance payments that have to be made and if they can help in the future with the transition to becoming a limited company.

Benefit from an umbrella company

Saving time is the main benefit for the contractor when using an umbrella company.  Tax and national insurance can be complicated issues when dealing with them on a self-assessment basis, so by freeing up this time, the freelancer is able to concentrate on work instead. 

The umbrella company can also work well as a stepping stone between employment and becoming a limited company.  It may be that the freelancer wants to work independently but does not yet want to deal with all the issues that surround becoming a limited company.  Therefore, individuals can be self-employed and responsible for finding their own work, but still retain all the benefits of standard employment.