If you choose to use an umbrella service you are essentially a PAYE employee of the umbrella. Your client or agent enters a contract with the umbrella for your services and you enter a contract with the umbrella. You send your timesheet and expense details, tax and NI are deducted before you receive your money from the umbrella company.
What are the advantages of using an umbrella company?
The advantages of using an umbrella company are mainly much reduced administration and paperwork. They might be suitable for a contractor who expects to use a particular agency for a long term contract or perhaps a new contractor who is starting out and is not certain he or she wants to run a limited company.
Umbrellas can perhaps work well for short-term contractors who do not want to form a company only to have to dissolve it because they are no longer a contractor.
People who use umbrellas like the fact that they can represent less hassle. They believe they are outside IR35 because they are PAYE and are reassured by IR35 insurance.
What are the disadvantages of using an umbrella service?
This is the most expensive way of working in terms of tax and NI. You are reliant on the umbrella company to collect your money from the client or agent and then pay it on to you. Normally you will pay around £100 a month for an umbrella service. Many umbrella companies claim special dispensations for expenses with HMRC. Also, those working through umbrella companies need specific, accurate records for any expenses claimed. If you haven’t actually spent the money and have the receipts to prove it was wholly in connection with work, you simply will not be able to claim expenses.
Can using an umbrella company can protect me from IR35?
Umbrella companies may suggest you can remove IR35, and indeed IR56 and S660A by working through them because you (the contractor) are an employee and are paid PAYE. While it is true that IR35 does not apply to the umbrella company itself, your working relationship with an agency or client and contracts involved will determine your company’s own IR35 status. Each contract should be reviewed in its own right and a decision made on its IR35 status.
