Updated 01 October 2020
As a contractor, you will probably have to operate via a limited company rather than be a sole trader. You could set up your own one-person company, or use a UK umbrella company. An umbrella company gives you the option of having an employer while still working on a contracted basis. That means you don’t have to worry about tax returns, because they’ll take care of it for you. But is being a contractor through an umbrella company all it’s cracked up to be? Let’s find out.
What is an umbrella company and how does it work?
Umbrella companies act as third party employers for contractors. As the contractor, you can still choose the projects you work on, but you have an employer taking care of your employment admin.
All umbrella schemes work in the same way, no matter whether you are a builder, IT contractor, graphic designer or whatever. When you’re contracted to work on a project, the umbrella company will invoice your client for the work and collect payment. You’re enrolled on the umbrella company’s PAYE system and they pay you an income from the invoice after deducting items like tax, National Insurance contributions and agreed fees. They will also deduct any applicable expenses, but these will normally need to be agreed by the client first.
What tax do I pay working under an umbrella company?
Even though you’re a contractor, HMRC considers you a permanent UK employee when you work under an umbrella company. You’ll be given a tax code and pay a basic, higher or additional rate based on your income – just as you would if you were employed by a company full or part time.