Contracting via an Umbrella Company: Pros and Cons
As an independent contractor you will have to weigh the pros and cons of different ways to contract with clients, get paid and handle tax and social contributions. This is one of the realities of contracting, because you are essentially an independent business owner. You have a few options to accomplish this as either a self-employed individual, an employee of your own limited company, or through an umbrella company.
If you are not familiar with how umbrella companies work, this guide details some of the advantages of using an umbrella company versus the other methods, as well potential downsides.
What is an Umbrella Company?
An umbrella company is a third party entity that acts as a go-between for you and your client, and fills a role similar to a formal ‘employer’. They will work with your client and/or agency to facilitate payment and verifying client satisfaction with project fulfillment.
What this means is that you and your client will both some degree of assurance when entering a new contract, and this may even give your client the confidence they need to hire you.
The umbrella company also deducts taxes and social contributions for you based on the rates and rules in place in the country you are working. This can be a real help for all parties when working internationally, where the challenge of payment and compliance can be a significant hurdle for contractors.
Should You Use an Umbrella Company?
At first, you might wonder why you should use an umbrella company, especially if you are used to handling your contracts on your own, or have a limited company already. The fee that you pay the umbrella company can be worth it if you are entering an unfamiliar country, or have a new client that would like to have some way to verify terms and performance.
Use of an umbrella company can remove much of the uncertainty for you and your client when entering a new engagement and are facing unusual circumstance. One thing to remember is that you don’t have to use one for every contract, just those where you feel like you need more support than usual or are concerned about payment or compliance.
When you are trying to decide which course to take it can be helpful to weigh the pros and cons of an umbrella company to guide your choice:
Pros of contracting via an umbrella company
- If you are new to contracting an umbrella company can be a way to ease the transition to being self-employed.
- You can begin to work through an umbrella company almost instantly, even if you have just secured your contract.
- It is easier to use an umbrella company than set up your own limited company, which involves business registration and meeting tax regulations.
- You eliminate a lot of paperwork, accounting, invoicing and legal steps involved with contracting.
- Umbrella companies are ideal for short-term contracts where a DIY approach makes administration a burden.
- The umbrella company will make sure that you are in compliance with all tax and social contributions, no matter where you are working.
- If you are entering a new foreign country, you may not have the option under local rules to be self-employed, so an umbrella company can step in and legally manage the work contract for you.
Cons of contracting via an umbrella company
- Working with an umbrella company does limit some of the tax benefits of having a limited company or being self-employed, such as business deductions.
- You lose some control of the financial aspects of your work (invoicing, receiving funds) and the umbrella company will pay you much like an ‘employee’.
- Some contractors may not want a third party to be so involved in their client contracts and business.
What it really comes down to is how independent you want to be in performing the full scope of your contracting, or if you prefer to have the support of a third parry umbrella to ensure that your work, compliance and payment all go smoothly.