Choosing an Umbrella Company

When it comes to choosing an umbrella company, it's important to know that they provide the same legal structure as a limited company but removes the administrative burden normally associated with contracting by providing a ready made solution, available to a large number of unconnected contractors.

An umbrella company usually issues invoices on the contractor's behalf, collects payments from clients/agencies, calculates tax and NI contributions and pays the contractor their net pay direct to their personal bank account.

With hundreds of umbrella companies out in the market place choosing an umbrella company is not always easy. Here are our top tips to choosing an umbrella company that's right for you.

1. Avoid umbrella companies that have entry fees, exit fees or minimum term commitments with penalties for leaving early. There are plenty of umbrella companies to choose from so be sure to check for hidden costs.
    
2. Some umbrella companies have complex fee structures that link their fees to your earnings. As you can imagine this can turn out to be expensive for you as a contractor. There are lots of umbrella companies that clearly advertise fixed fee charges.
    
3. Steer clear of umbrella companies that tell you that it is ok to claim expenses without receipts. Should HM Revenue decide to investigate your accounts your expenses would be disallowed and you would be liable for all the tax owing.
    
4. Choose a compliant and externally reviewed or audited umbrella company. Auditing is becoming increasing more common and is helping to increase the quality of the services that the umbrella companies are offering.
    
5. The only way of receiving payment through a third party, post 2007 budget, is through PAYE. Your umbrella company should be deducting income tax and national insurance contributions from your earnings. Any other payment structure e.g. dividends, loans etc has been declared illegal by the Government and, despite what some unscrupulous companies may tell you, there are no loopholes.
    
6. Personal recommendation is a good indicator when making your decision but bear in mind that some agency recommendations may come from 'incentives' which are given by the umbrella company.
    
7. Finally when choosing an umbrella company remember – if it seems too good to be true then it probably is!