What is an IT contractor umbrella company?

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What is an IT contractor umbrella company?

Published on Apr 2, 2008

IT Contractors typically set up in business via their own Limited Company, or via an Umbrella Company.

The Umbrella Company acts as your employer in the structural sense, and invoices your recruitment agency or client on your behalf, based on your timesheet details.

The Umbrella Company will then deduct National Insurance and Income Tax, and take care of all your paperwork and expense claims, before paying you your net PAYE income.

Unlike the limited company route, IT Contractors are free of the administrative burden of running a company, however they may not be better off going down the umbrella route - this all depends on their individual circumstances, particularly in relation to IR35.

Since IR35 became law in 2000, the tax benefits of contracting through a personal limited company were massively reduced for those caught by the rules. As a result, many new umbrella companies have emerged in recent years as demand grew from contractors whose contracts were deemed to be caught by IR35.

For short-term IT contracts, the umbrella route may well be the most sensible one, rather than setting up a limited company for a few months work.

With such a large number of umbrella companies offering their services these days, it is worth seeking recommendations from other IT Contractor colleagues before signing up.

Friendly, efficient service is essential for any umbrella firm - do not necessarily choose an umbrella provider on price alone. You might also ask your recruitment agency which umbrella companies they recommend.

We would recommend choosing a company who charges a flat weekly or monthly fee, not a fee based on your contract rate (as the work they do is exactly the same, regardless of what you're earning).

And finally - don't be kidded by claims that an umbrella company has some kind of "special expenses arrangement" with HMRC - there is no such thing. You can only claim expenses which have genuinely been incurred while carrying out your IT contract duties. In fact, only recently, HMRC announced that it was clamping down on "rogue umbrella companies" who have been abusing their expenses dispensations.

You can read more about the pro's and con's of choosing a contractor umbrella company here. Also, why not look at our list of 40+ umbrella companies.