An Umbrella Company is a great way for a new contractor to concentrate on getting their business off the ground while not having to deal with any paperwork or tax issues.

The third party Umbrella Company deals with all of this, and many freelancers have found it to be the ideal solution.

Umbrella Company

Umbrella (Photo credit: Wikipedia)

How does an Umbrella Company work?

An Umbrella Company is independent from the contractor; however, the contractor registers with the company as an employee, even though they find their own work and make their own decisions. As an employee, it is important to give the Umbrella Company a P45 or P46 and other relevant details, such as bank account details, so that payments can be made both to the employee and to the Inland Revenue.

At the end of every week or every month, a timesheet is submitted to the Umbrella Company so that it can issue an invoice to the client. The advantage of this is that the Umbrella Company chases all monies due and the contractor is free to go and find new clients and get on with their work.

Payments are then made to the contractor with all tax and National Insurance contributions already deducted, along with the company’s fees. It is possible that some expenses can also be claimed, and the Umbrella Company will advise on what can and cannot be claimed.

There are some companies that will tell the contractor to claim for anything and everything; however, this is not actually permitted.  Expenses must have been fully incurred while conducting contract work, and must be backed up with receipts.

The advantages of using an Umbrella Company

When a contractor is starting out on his or her own, they can often find themselves weighed down by all the administrative details and this can end up putting some freelancers off the idea of being independent. Handing all of this over to an Umbrella Company will ensure that there is time to concentrate on finding clients and building up the business, which is one of the hardest things to do when starting out.

The whole issue of taxation and National Insurance can be very daunting when a contractor starts out on his or her own, and they could end up paying expensive accountant fees while they work out exactly what needs to be done. The Umbrella Company removes the need for this, meaning that there is nothing for the employee to worry about.

This type of service is also ideal for those who are working independently for a short period of time. A freelancer who normally works full-time for an employer but is between jobs may find it far easier to use the services of an Umbrella Company rather than registering with HMRC for a month or two and then de-registering when another full-time job comes along.

When the contractor registers with an Umbrella Company, they have their own account manager on hand to deal with any queries as they arise. All the information needed is given at the time of registration. The company will also have a website that should detail the process from start to finish, as well as explain how to register.

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