IT Contractor Umbrella Company - Compare - Guides

So you have decided to take the plunge into contracting, swapping the permie life for a more flexible way of working and one that can increase your earnings.

The hard part is finding your first contract, but with that out of the way, if you have decided to work via an umbrella company, you now have to decide which of the hundreds of umbrella service providers out there is the right one for you.

Here, Rob Crossland, chief executive of Parasol, offers a few tips.

Since the introduction of IR35, the tax advantages of using umbrella companies alongside the special dispensations they receive means that they provide a very cost effective and responsible way for contractors to work and an ideal vehicle for first time contractors finding their feet.

What should a good umbrella offer?

A correctly structured umbrella company should provide a complete professional employment service for contractors which will include a full contract of employment, HR support, guaranteed hours of work, invoicing and timesheet management, tax and National Insurance contributions (PAYE and NICs) and statutory HMRC notifications.

A good contractor focused umbrella will also issue invoices on the your behalf, collect payments from clients/agencies, calculate tax and NI contributions and pay you your net pay direct to your personal bank account, without holding on to it.

Expenses

Umbrella company employees are also able to claim tax relief on expenses incurred in the course of undertaking their work (travel, subsistence and overnight expenses etc.) which will usually uplift take home pay. To assist them, umbrella companies have negotiated dispensations with HMRC to derive higher levels of operational efficiency. This is achieved by streamlining administrative processes and in some cases eliminating the need for receipts.

A word of warning here though! It has to be acknowledged that there are some unscrupulous providers out there who claim to have dispensations and will abuse them by encouraging you to claim for un-receipted expenses you may not have incurred. This is extremely bad practice and any good umbrella service provider will urge you to claim only for genuine expenses and encourage you to keep all your receipts regardless of any dispensation. You should be able to produce all receipts in the event that the HMRC requests them.

'Compliance' claims

Be wary of claims such as 'HMRC approved' or 'IR35 compliant'. HMRC does not approve or accredit companies so this doesn't actually mean anything. Neither does IR35 compliant in the context of umbrella companies as you will be taxed under normal PAYE as an employee.

Contractor benefits

In addition, with a good umbrella company, you will be fully supported by its HR function in the event of a grievance or disciplinary procedure, be entitled to a package of employment rights and have access to a range of affiliate offers such as discounts on financial and legal products plus other contractor benefits.

Do your research

Spending a bit of time online doing the research will help you make your selection but don't rely on the providers' website for advice as they may not be impartial. There are plenty of good contractor websites though which will have lots of useful advice. It's worth spending some time lurking on various contractor forums as well. You will soon get a feel for which companies are popular and which have a bad reputation amongst your peers.

Umbrella fees and extra costs

Next, make sure you have a clear understanding of each umbrella's fee structure and identify any hidden costs such as a leaving fee. Does the umbrella charge you a fixed monthly or weekly fee or do they charge a percentage of your gross invoice value? What is included in the fee you are paying e.g. does it include professional indemnity or employer liability cover, etc?

Payment process

The next thing to establish is the umbrella's payment frequency and its speed of invoicing. How often do they run payrolls in order to ensure their contractors are paid as quickly as possible? And how long does it take to raise your invoice after you've submitted your timesheet? All of these factors will impact on how quickly you will be paid.

How well established is the umbrella?

Ask any potential umbrella which agencies they work with. This will give you some indication as to their popularity in the industry. With that in mind though, some agencies will have a preferred suppliers list (PSL) but remember this is not a recommendation and will not necessarily have been put together on an objective basis. Also find out how long the umbrella has been in business and how many contractors they currently employ, this will give you an idea of their pedigree, i.e. a well run umbrella business that is well established and enjoys a large market share as opposed to a 'fly-by-night' provider looking to make a quick profit on the back of your hard work.

Online facilities

Finally, the majority of umbrella companies use online portals for their contractors to upload their timesheets, manage their details and check on the progress of payments and expenses. Ask to see a demo of their portal and make sure that submitting your timesheets will be as easy as they say it will! Make sure that the umbrella you choose to work with has the highest levels of security and treat your log-in information as you would your bank account.

And finally...

Working through an umbrella should be a hassle free way to work as a contractor and the service provided should allow you to do what you do best, your job! Remember, if you aren't happy with the services you are receiving you always have the right to leave and move elsewhere.