Umbrella Companies and Freelance Contractors

Q. What is an umbrella company?

A. An umbrella company is an organisation set-up to employ a number of freelance contractors and sub-contract them to Recruitment Agencies / end-users. It is normally run and owned by accountants or others who specialise in the freelance financial sector.

Q. How does an umbrella company work?

A. Unlike the limited company option, with a PAYE umbrella company, you become an employee of the umbrella company.

Every week (or month), on receipt of your timesheet, the umbrella company will invoice the client on your behalf. Once the client has paid the invoice, you will receive your income from the umbrella company, net of income tax, national insurance contributions, and the umbrella fee.

Q. How do I decide whether to set-up my own company or join an umbrella company?

A. This largely depends on your own attitude. Generally speaking you will achieve a higher net return from operating through your own Limited Company, as you have the opportunity to offset more expenses against your income. However by joining an umbrella company you will generally minimise your administration obligations, and umbrella companies tend to often suit contractors who may only be intending to contract in the short-term. However we can give you a personal illustration on request.

Q. What is an umbrella company ‘expenses dispensation’?

A. Some umbrella companies claim to have been given ‘generous’ or ‘special’ expenses dispensations from HMRC for their contractor workforce. However, there are no special expenses dispensations – these are created purely to cut down on paperwork rather than providing bonus expenses payments to contractors. In our view there will no longer be dispensations available to Umbrella type companies due to HMRC’s view on the legitimacy of such expenses.

Q.Does Clarity operate an umbrella company?

A. No – Clarity does not offer the Umbrella Company option as we believe that current comments by HM Government and HMRC, and recent court cases surrounding Umbrella Companies, mean that this option is now open to investigation by HMRC, and is therefore too risky. Read more about why Clarity does not offer an umbrella company service.