Knowledge Centre

An umbrella company is like a middle man, it is an organisation that employs freelance contractors and then each contractor goes and works for their end clients.

For example:

• You are a contractor and get a contract through a recruitment agency with lets say the BBC.

• You are advised by the recruitment agency to use an umbrella company as the means of getting paid (the recruitment agency advises this because they get a healthy commission from the umbrella company - remember the recruitment agency is a recruitment agency and not a firm of tax advisers, they can not give you the whole picture).

• You start your contract working at the BBC and send your working hours (time sheet) to the umbrella company.

• The umbrella company bills the BBC and then deducts tax and National Insurance, keeps their middle man fee and gives you the remaining amount.

• You take home in the region of 60-65% of the contract value.

This is not a tax efficient system.

So why do some freelance contractors use umbrella companies?

If you are planning on contracting for less than 3 or 4 months then it makes little sense forming a limited company and contracting through it.

If however you are planning on contracting for more than 4 months it makes little sense to use an umbrella company.

For a personal review of your circumstances please contact us.