As a IT contractor one of the first decisions you need to make is whether you set up a limited company or use an umbrella company. This decision can be a tough one. In this series of blogs we take a look at the options and highlight the pro and cons of both. First we look at what an umbrella company offers:
What does an umbrella company do for you as an IT contractor?
If you join an umbrella company, you are an employee of the scheme. The umbrella company acts as a go-between for you and the client. Primarily, they organise payment for your contractor work.
An umbrella company is great for the IT contractor who wants to avoid administration duties such as issuing invoices, chasing payments from clients / agencies, calculating tax and national insurance (NI) contributions. As you are employee of the umbrella company the IR35 legislation does not apply.
The umbrella company will charge a fee for their services. For a new IT contractor the umbrella company is often an appealing option, as it provides an easy and cheap way to decide if contracting is for you.
All you need to do is complete your online timesheets and expense claims, this can usually be done using a mobile device. The umbrella company do the rest. They will raise an invoice and send it to the agency or client. If required they will chase payment when the invoice is due to be paid. Upon payment the umbrella company will calculate your tax and N.I. and transfer your net pay to your bank account.
You should investigate umbrella companies and chose one that is complaint in order to receive the best advice. They can advise on making the most of your income by claiming allowable expenses that don’t attract tax or National Insurance Contributions.
While it is more tax efficient to work as a limited company, you do not have to make any long-term commitments to contracting under an umbrella company. It’s a ‘hassle free’ route for many IT contractors.
An umbrella company is a good choice if you are a new IT contractor and want to test the water with one client. Additionally, if you are on a lower daily rate there may be very little difference in tax efficiency.
Use this calculator to work out how much your net income could be.
More information is available at https://www.itcontracting.com.
If you need advice or have a requirement for an IT contractor or are an IT contractor looking for work call us on 0844 8794523.
Check out next weeks blog for information on setting up a limited company.