Umbrella company guide: What new contractors should know

While the number of full-time salaried roles available in the UK has seemingly dropped significantly since the global financial crisis of 2008, you may be surprised to learn that there are a wealth of opportunities available to contractors.

The recession caused many companies to cut staff and reduce their personnel budgets, so large numbers of firms are looking for skilled professionals to complete short-term projects for them.

You will even find that contractors generally earn more for completing these projects than a salaried member of staff, owing to the short-term nature of the work. The ability to secure contracts from a wide range of clients means that many contractors find they earn more than they did when previously employed.

This is before you even consider what many believe to be the biggest plus point of contracting – the freedom it affords you to decide when, where and how you complete your contracts.

However, there are a number of things to be aware of when you take this career path and a key decision is whether you set up and operate through a limited company or choose to utilise the services of an umbrella company such as PayStream.

While limited company contracting has additional financial benefits as you can legally limit your tax and National Insurance burden, it also requires you to keep detailed, extensive accounts and many feel that the additional administrative tasks required are not warranted by the financial gain.

A viable alternative that has proven to be increasingly popular is to operate under an umbrella company.

In addition, HM Revenue and Customs (HMRC) has introduced a piece of legislation called IR35, which can restrict you from operating as a limited liability contractor if it is the client that determines when, where and how you complete the contract.

If this is the case, an umbrella company will be your best option. These firms will essentially act as your employer, handling all of the administrative tasks associated with contracting on your behalf.

All you will be required to do is complete a timesheet and claim your expenses – which many firms allow you to do online these days. You will then receive your payment into your bank account, much like if you were a traditional salaried employee.

What’s more, the umbrella company will have already handled any tax or National Insurance deductions on your behalf, meaning you do not need to worry about any of this and can simply concentrate on contracting and your life outside of work.

In addition, while limited company contractors are not eligible for holiday or statutory sick pay and must budget effectively to account for the times they will not be bringing in any income, there are provisions for this when utilising an umbrella company.

Those who have been off sick for four days can usually claim sick pay, as long as they have a valid sicknote. Furthermore, umbrella companies will withhold a small amount of a contractor’s pay each month, rolling it over to be used as holiday pay when required.

This means that umbrella contractors can enjoy much the same benefits as salaried staff, but with the additional freedom that comes with contracting.