What is Umbrella Company and How Can It help Your Business?

What is an Umbrella Company?

Increasing numbers of people are opting to leave the fixed and rigid world of salaried employment and working more flexibly as freelance contractors instead. Typically, contractors secure fixed term contracts with different firms and organisations through recruitment employment agencies. Whilst some operate through their own single person limited companies, many others choose to work through umbrella companies.

Umbrella companies effectively treat contractors as employees, calculating and paying all their PAYE tax contributions and offsetting the income through tax efficiencies such as expenses allowances. These can be claimed for meals, travel and accommodation. The umbrella company issues the recruitment agency with invoices on behalf of the contractor (sometimes, it will issue invoices directly to the client the contractor has been working for).

One of the major appeals of umbrella companies to contractors is not only the amount of time they save by handling PAYE, NICs, VAT returns, payroll issues and company accounts. They also shield all contractors who work for them from the effects of IR35 legislation, which was introduced to prevent freelancers from entering into "disguised employment" - i.e., receiving payment from a client through an intermediary but retaining the same kind of relationship with that client as an employee had they been paid directly.

IR35 has proved exceptionally unpopular amongst the contracting community since its inception, with some limited company contractors in particular fearing that it unfairly presumes in too many cases that they are working as disguised employees rather than bone fide freelancers. Umbrella companies ensure that all agency contractors on their books are classified as employees and need not fear a protracted and stressful IR35 investigation by HMRC as a result.

How can an Umbrella Company Help Your Business?

If you need a specific batch of skills for a discreet, time-limited project - perhaps installing a new IT system - hiring an IT professional as a permanent member of your company staff can be an expensive business. As an employer, you'll be responsible for PAYE and NICs, as well as all the associated costs of permanent staffing - payroll administration, holiday pay, sickness pay, insurance and so on.

Umbrella companies supply a range of highly skilled contactors who work on a time-limited basis to complete specific projects. None of the additional costs associated with permanent staff apply. The umbrella company handles all that, and the contractor's recruitment agency will find ongoing work placements when temporary contracts come to an end. Your company just gets the skills you need, when you need them, and you pay simply for the specific project you've commissioned.

Tips for managing your business

Think carefully about the staff you require on a full-time, permanent basis. Your business may require additional skills or resources from time to time, either because you are upgrading a system such as your business telephones, security or IT, or because demand for your service or product has surged in a volatile market and you need to be able to respond.

Hiring permanent staff in these cases is not necessarily a wise option - but drafting in skilled temporary staff through an umbrella company can be the ideal solution. No payroll expenses, no NICs, no sick pay - just skilled workers, efficiently doing whatever has to be done, for as long (or as little) as you need them.