Umbrella companies vs. PAYE
There are many reasons why people choose to work through an umbrella company, rather than as a limited company or on agency payroll.
One of the main reasons is IR35 legislation, which affects the way you are taxed. If you fall within the scope of IR35, working through an umbrella company can help to reduce the total tax you pay.
But there are many other reasons why contractors choose to work through an umbrella company too, including if they're just starting out and want to keep things simple.
3 benefits of working through an umbrella company
Regardless of your IR35 status, there are multiple benefits of working through an umbrella company:
Fast and Easy to Start
You can register with an umbrella company within minutes, leaving you fully set up and ready to start working with no delays.
If you're a first-time contractor or you're working on short-term contracts, an umbrella company is a good way to simplify your tax status.
Umbrella companies give you a strong start to your freelance career, but they also bring stability, as you can stay with the same company for the long term.
Confidence About Costs
Your umbrella company can take care of all the necessary deductions from your earnings, to cover your Pay As You Earn income tax and National Insurance contributions.
This means you pay tax on your earnings as you go along - no more surprises when you file your accounts, and no more January 31st deadline to pay your self-assessment bill and next year's first payment on account.
As a result, you benefit from smoother cash flow and better visibility of just how much money you have available to spend on your business, or on yourself and your family.
Pension Planning and Mortgages
Umbrella companies make it easier to save into a pension or apply for a mortgage, as steady cash flow is better suited to savings and loans that require regular monthly payments.
You can set up a regular deduction alongside your PAYE and NI contributions to go into a pension plan, with tax benefits if you choose to do so.
And you can use paperwork provided by your umbrella company to apply for a mortgage, without having to go for a specialist self-employed mortgage provider or broker.
More advantages of umbrella companies
The list of advantages of umbrella companies goes on and on. For example, compared to working on an agency payroll, umbrella companies can offer the following benefits:
You get an employment contract that sets out all the benefits you are entitled to, so you know exactly where you stand and can have total confidence that your arrangement is completely legal and correctly documented.
Manage your accounts online via your umbrella company's web portal.
Stay in continuous employment on paper when working on multiple contracts.
Access statutory rights like sick pay, maternity/paternity pay and bereavement leave.
Claim tax relief on business expenses as you go along.
Keep a single pension plan across all the agencies you work for.
Alternatives to umbrella companies
The Employee solution from MyPay+ is an alternative to umbrella companies, if you are worried about recent changes to IR35 legislation and other contracting rules and regulations.
It allows you to be paid directly through our group as an employee, with a contract and benefits, including holiday entitlement.
You'll have a continuous employment record, along with entitlement to tax relief on allowable business expenses, and it's fully compliant with HMRC RTI requirements.
To find out more, email us on firstname.lastname@example.org or call us on 01925 912200 and we'll be happy to answer your questions or provide a quote tailored to your personal circumstances.