Contracting And Freelancing : A Guide To Tax Umbrella Companies
Many contractors working across a wide range of industries make use of something known as umbrella companies. This guide looks at what an umbrella company is and how they can help contractors with their tax liabilities. An umbrella company is a company that acts as an employer for contractors who would otherwise be self-employed. They usually deal with the companies the contractor is working for, which usually means administrating a range of fixed term assignments on behalf of the client and contractor.
Contractors use them for several reasons, one of which is that they are very useful when it comes to sorting out issues of tax. Without using the services of an umbrella company, a contractor would more than likely have to sort out their own tax contributions. However, tax is taken care of on their behalf if they have an umbrella company acting as their employer. The company charges a fee in exchange for this service and they usually deal with the contracts as this limits liability.
If you use an umbrella company for these purposes then as the contractor, you will need to submit time sheets and other information to them. The company will then invoice the company who contracted you for the work you have done. You will usually then receive your money through the umbrella company and they will take care of all PAYE issues for you, which helps to make tax issues a lot easier. Working for them also means you’ll benefit from things such as sick pay.
Expenses are another issue that contractors need to think about and using an umbrella company can help to make this easier, too. For instance, you will normally be asked to submit an expenses report along with your timesheet so you won’t lose out for any money you may have spent in the course of your work. Depending on the nature of your expenses, you may be able to offset them against your tax payments, but bear in mind expenses are ultimately your responsibility – not the umbrella company.
Some contractors also use umbrella companies to deal with their tax affairs as it can provide a beneficial alternative to opening their own limited company. Dealing with an umbrella company provides some of the benefits of this without the extra administrative burden, which can also add to the cost of being self-employed. This means that umbrella companies are very useful for contractors who are keen to meet all their necessary tax liabilities without adding a large amount to their administration processes.
Further reading – Umbrella Company
