Using an umbrella company to your advantage

Working as a freelancer can be difficult, as there are many complications that simply do not exist when working as an employee. However, it is possible for contractors to become employees of an umbrella company and thus eliminate the difficulties associated with being self-employed and retain the flexibility of hiring.

How Umbrella Companies Work

An umbrella company is, in effect, a position at the employer for contractors. It employs the contractors and in doing so simultaneously takes over all of the contractor’s management and processes their payments, or in other words, pays them a salary. For its services, an umbrella company charges a fee that is deducted before the contractor receives his salary. The contractor does not work for his client directly, but provides his services through the umbrella company. In some cases, the contractor will use an agency to search for clients rather than search for them themselves. In this scenario, the client will pay the agency that will pay the company for the contractor’s services after deducting their own fee.

Tax

As the worker receives a salary from the company, the income tax is deducted from the salaries in the usual way through Pay As You Earn (PAYE). This is done automatically by the company, which also deducts the National Insurance before paying the worker. Therefore, the money received by the contractor is his final pay after taxes. In terms of tax reduction, for the self-employed who are in a higher tax bracket, using an umbrella company can lower their tax expenses as they would then pay taxes through PAYE as employees.

Expenses

A contractor can claim the corresponding expenses when working through an umbrella company. This can minimize the amount of taxes that the contractor pays, since the expenses owed are paid to the contractor separately from his salary and are therefore not affected by income tax. This is not a way to cheat the system and avoid mandatory taxes; All expense claims must be legitimate in the eyes of the law, something these companies are very careful about. Allowable expenses refer to any necessary expenses incurred by the contractor to perform their duties and may include things like travel, food and drink, training, and lodging. Working through such a company makes this whole process much easier for the contractor, who simply sends all the receipts and details of the expenses incurred to the umbrella company, which then pays these expenses to the contractor along with their salary.

Umbrella companies offer contractors security and flexibility and eliminate all the hassles that self-employment is known for. As any contractor will know, it can be very stressful to make sure you are fully compliant with taxes and mistakes, honest as they are, are not treated lightly and can incur devastating financial penalties. This type of company assumes the responsibility of the contractor giving them the peace of mind that they are minimizing the amount of taxes they pay but in a legitimate and legal way. They will also seek customer payments on your behalf, as the company pays you instead of the customer. Usually all the details can be exchanged very easily and contractors can submit their timesheets and expense information online. You can also establish a contributory pension plan as a contractor working for an umbrella company.

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