How to choose an umbrella company
One of the most important considerations for a new contractor is whether to join an umbrella company or to go for an alternative trading solution, such as a limited company or becoming a sole trader. This article will focus on choosing the right umbrella company and will provide three useful tips to help contractors make the right decision.
1- Considering Umbrella Companies' fees and payment schemes
There are two main ways in which umbrella companies charge for their services. One way is by deducting a fixed percentage from every invoice a contractor submits. This method can prove to be quite costly, particularly to contractors who submit invoices regularly or who earn little. Typical percentages are in the region of 5 per cent over the total amount of the invoice, so every contractor must make their calculations to see if this method suits them financially or not. Some umbrella companies who work on a percentage-per-invoice basis set a cap on the total amount that can be deducted, typically ranging between £30 and £50 every week.
The second fee scheme used by umbrella companies consists of charging a fixed weekly or monthly amount for their services. A recent price comparison chart showed that although there is no much difference between the weekly fees charged by different companies (often in the range of £26 to £30), monthly fees can vary substantially (in fact, the variation can reach 63 per cent).
2- Beware of false claims
Some umbrella companies advertise their services claiming that they can help contractors earn more or take home higher amounts of income. These claims are totally unsubstantiated, and more importantly, they are false. Every single umbrella company operating in the United Kingdom is regulated by the Inland Revenue. It is the HM Revenue and Customs department who determines how much is to be deducted from a given salary and how much a contractor takes home. Therefore, no umbrella company can help you earn more or pay less.
Similarly, no umbrella company can be approved by the Inland Revenue, as this is not a function that belongs to this institution.
3- Determining how established and reputable is an umbrella company
Before deciding to join an umbrella company, contractors should consider the possibility that the company might go bankrupt. In 2011, two umbrella companies failed to pay the due taxes and contributions on behalf of over 1,500 contractors. The companies were investigated and were subsequently forced to cease trading, while the contractors affected remained liable for the taxes they owed. It is therefore crucial to make sure that your money and business are fully protected to avoid unnecessary losses.
Some questions worth asking before engaging the services of an umbrella company include:
- Can the company prove that it is regularly audited by independent third parties?
- Is the company a member of the Freelancer and Contractor Services Association?
- Does the company work with a chartered firm of accountants?
- How exactly are service levels guaranteed?
- Is the company certified to international quality assurance standards (ISO 9001)?
No contractor should enter an agreement with an umbrella company without fully understanding the implications and costs involved. By doing their research and taking into account the suggestions made in this article, contractors can ensure a successful venture.