Empowering the Freelance Economy

Is joining an umbrella company a good way to jumpstart a freelance career?

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If you’re interested in trying out contract working and are not ready to register your own company yet, umbrella companies could provide a taster into freelancing. With an existing client bank and full administrative control, it’s arguably a simple way to start your new career, according to Kris Simpson, Head of Business for Cool Company, a European “self-employment company” serving contractors and consultants with operations in Sweden, Norway and the UK.

But with stories of unscrupulous umbrella operators pocketing contractor holiday pay, complicated payslips and national insurance hikes, is there any use going the umbrella route? Simpson outlines his argument why there is.

Is there an easy way to see if contracting is right for you?

The allure of being your own boss has always been great. And despite a dip throughout the pandemic, the number of self-employed workers in the UK is still at one of its highest-ever levels. There were just over 4.2 million self-employed UK workers in November 2021, including freelancers, contractors, and SMB owners. And there are many more people who dream of taking that leap – the problem is that it’s hard to know where to start.

Whether you’re currently employed, recently redundant, or retired but in need of a new challenge, freelancing and contracting hold huge potential. But starting out can be both difficult and expensive. So, what can you do if you want to test the water? The solution might be to work with an umbrella company.

What is an umbrella company?

Umbrella companies take the role of go-between for contractors and the businesses that wish to work with them. They manage contracts, payments, and compliance, so the contractors and their clients can focus on the job at hand.

How do you start working with an umbrella company? Do you need your own business first?

All umbrella companies allow [would-be] contractors to take on contract assignments without having their own limited company. The process is relatively simple:

  • You register an account, which can take less than five minutes.
  • You’ll be requested to provide compliance documents. Once these have been verified you can start your contract assignment.
  • While you’re working, you can register the hours you have spent on the project, so that the umbrella company can invoice your clients instantly
  • Once the invoice is paid, the umbrella company will run the payroll and pay you.

Do umbrella companies charge a fee?

Umbrella companies are businesses. They have to pay people to manage the tasks that the contractors and their clients want to avoid. So, an umbrella margin is taken to cover the administration of payroll, insurance, and access to an easy-to-use platform.

How can umbrella workers ensure that the reported tax payments on their timesheets match those reported by an umbrella company to HMRC?

There have been a lot of stories about bad practices amongst umbrella companies in the past. But today, it’s in nobody’s interest to flout the law. If you are working with a compliant PAYE umbrella company, they will use HMRC-approved software to manage your account. This will automatically link PAYE data with HMRC to ensure taxes are correct and recorded.

Is it true that umbrella company workers will pay more than other contractors because they will have to pay for both employee and employer national insurance taxes?

No. There are a lot of misconceptions about working with an umbrella company, but that is probably the greatest. If NIC and holiday pay are incorporated into the rate that you quote your clients, you will receive a similar income to permanent employees. In 2010 the government introduced the Agency Workers Legislation to help combat the exploitation of contract workers.

Is it possible to use a single umbrella company to invoice clients in different countries?

One of the major benefits of working with an umbrella company is that you can gain continuous employment (if you wish it), through multiple clients, potentially from all over the world. Either individually or simultaneously. Your tax rates will depend on which country you are conducting the work in, but an umbrella company will handle this for you.

Kris Simpson is Head of Business for Cool Company UK, a “self-employment company” working to simplify and streamline administration for consultants and contractors. It is part of Verdane Capital Holdings, which was founded in 2009.

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