Umbrella companies: Make the right choice

Using an umbrella company can be a simple process. However, before you choose it is important that you select the firm that offers the most to you.

There are also a number of factors contractors should be aware of when deciding which one to use.

Reputation

Umbrella company reviews can be a good place to start. Online testimonials from fellow contractors are a valuable source of information, but also ask freelance workers you know which companies they may have used.

A good reputation is essential as it allows you to feel confident with the company that is handling your livelihood.

Companies with an established history of payroll assistance are usually the best option for contractors as they will have the most experience. Using a newly established firm means contractors run the risk of losing their money to an illegitimate operator.

Openness

A top company should be able to provide you with a number of documents at your request. Items like a HMRC approved expenses policy and an employment contract are both good indicators that the firm is well organised and legitimate.

A face to face meeting can also be a good way to determine a company’s credibility. One-on-one contact with an umbrella company can give contractors a chance to get to know the firm handling their finances.

Where are they based?

Contractors should choose a company that is based in the UK. If you use a foreign firm it can make chasing up any problems a lot harder.

Composite companies

Contractors who wish to use an umbrella company should be aware of the differences to a composite company. Where as an umbrella will mainly pay through PAYE, composite companies have a slightly different way of doing things.

They may offer a different service which includes dividends as well as a salary. Firms that offer this service are usually known by the term “composite company”.

The way these tend to work is through a group of contractors forming together and owning the equity of the company – Shares of the business vary in class. The company bills clients and then a nominal salary is paid to each contractor. Minimal taxes and NICs are paid on the salary. Dividends are then also paid out depending on the shares you own – again lower tax is paid and no NICs.

If a composite company does not meet the relevant criteria of a Managed Service Company then it must also consider which contracts fall within IR35.

An umbrella company acts as an employer and therefore offers a salary through PAYE. This means that as your contract will fall within IR35 you do not have to concern yourself with it as much.

Ethics

What are the company’s views when it comes to topics such as tax and NICs – and do they match your own? Everything should be legitimate and above board in order to remain compliant with the HM Revenue & Customs.

All umbrella companies are regulated by HMRC, so if one is offering you something that seems too good to be true, it probably is.

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One Response to “Umbrella companies: Make the right choice”

  • Personally, I don’t really see why an umbrella company is important. It acts so much like a middle man that it can be eliminated. But seeing that the rules in the UK indicate that an umbrella company is required. I guess they don’t really have a choice.

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