The decision to use either a limited company or an umbrella company is explored in our guide 'Limited Company or Umbrella : Deciding on a payment structure'. The topic of choosing an umbrella has also been covered.
Umbrella companies are designed to remove nearly all the administration and company management associated with a limited company, which is why they are such a popular choice for contractors.
The main advantages for using an umbrella company are:
- It means you avoid the hassle of running a limited company
- There is no need to be involved with uploading data to an online solution, completing VAT returns, submitting RTI returns, company accounts, taxation, director’s responsibilities and so on
- For short-term contractors, a main advantage is not having the time consuming process of forming a company and then arranging for it to be dissolved
Compliant umbrella companies will offer you a full employment contract, together with all the employment rights and benefits that come with it.
When should you consider joining an umbrella provider?
You can wait until you have a firm offer from an agent before joining an umbrella schemes. Joining one is quick and easy.
After choosing an umbrella scheme to use the whole concept is based on simplicity, so there really is very little for you to do.
The process is very simple and most umbrellas will be able to set you up as a client within 24 hours.
Step 1: Inform your agent or client
You need to advise your agency or direct client the name of the umbrella company you are using, so that they can prepare their contract with the umbrella company’s name as “contractor”.
Step 2: Contract preparation and signing
The contract will usually be sent directly to the umbrella company by the agent. The umbrella company will arrange for it to be signed by their director and forwarded onto you for checking/countersignature as required.
Step 3: Personal and bank details
The umbrella company will also have a standard application form for you to advise them of your name, address and banking details for direct credit transfers to your account.
Step 4: Tax details P45
You will need to send the umbrella company your form P45 from your last employer.
If you do not have a form P45 they will issue you a form P46, which will enable them to obtain a tax code to operate on the salary paid.
Step 5: Umbrella contract
Some umbrella companies will ask you to sign their own standard contract between yourself as an individual employee/shareholder and themselves. This contract will specify the terms and conditions of the umbrella company service under which you agree to work and be paid.
How much are umbrella company fees?
The marketing of fees by different umbrella companies varies considerably. You should expect to pay between £25 and £30 per week for a high quality service, and as low as £5 per week for a basic payroll service.
Check whether or not that includes VAT, and see whether you can negotiate the fees down. Some umbrella companies charge on a percentage basis, but will often be prepared to negotiate, particularly with contractors on higher rates.
Anybody can set themselves up as an umbrella company, without any experience or qualifications, so it is important to know exactly who you are trusting to handle your hard-earned money. Most of the quality umbrella schemes are run by qualified accountants.