How an umbrella company makes for an easy transition into contracting

When you’re in the process of becoming a contractor there’s an awful lot of things to think about. The thing that’s probably foremost on your mind is the choice between founding a limited company of your own or joining forces with an umbrella company.

What you choose to do will probably depend on the reason you chose to become a contractor in the first place.

There are two types of contractors:

The born-to-it contractor

If you’re a born contractor, the decision to leave permanent employment was a conscious choice. You were sick of the office politics, the incessant 9-to-5 grind and the lack of variation. Contracting is a way to expand your horizons, define your own hours and gather new experiences.

The fell-into-it contractor

If you’re a fell-into-it contractor, it definitely wasn’t a planned career move. Maybe you got made redundant or you took a freelance gig while you were job hunting and suddenly you found yourself staring down the barrel of this new career. Maybe you’re not quite sure you want to do this thing long term, but it’ll certainly do for now.

If you err more towards the second category of contractor or you’re feeling conflicted about what to do, then it might be a sign that you need to give an umbrella company a try.

Why should I use an umbrella company?

Joining a contractor umbrella gives you the chance to try out the contracting lifestyle without committing to the financial outlay of forming a limited company.

To give you an idea of how much it costs to form a ltd company, take a look at some of the one-off and monthly expenses you’ll have to shoulder before your business takes off.

What you’ll pay out as the owner of a limited company

  • Registering your company with Companies House – £12
  • Hiring an accountant, in person or online – from £50 to £150 per month
  • Taking out insurance – variable, depending on your package, but it’ll lock you into a monthly payment. You’re looking at £10/month minimum
  • Setting up a web domain and URL – £10/month minimum
  • Web design – if you hire someone to do this, you’re looking at £50 minimum
  • Promotional expenses (business cards etc.) – around £20, if you’re doing things as cheaply as possible

So, that’s around £70/month in business fees and £30 in one-off fees. This may not sound like much, particularly if you’ve already got gigs lined up, and that’s a good sign that forming a limited company might work for you. However, if you’re nervous at the idea that you’d have to bear an extra £70/month at bare minimum when you’re not working, then an umbrella company could save you a lot of anxiety.

How do umbrella companies work when you’re just starting out?

When you join an umbrella, you become the umbrella’s employee. This means that you combine the flexibility and variety of your contract gigs with the benefits of permanent work: sick, holiday and maternity pay, workers’ rights protection and being covered by the umbrella’s employer’s liability insurance.

The other main benefit is that all the stressful admin of being a contractor is suddenly taken care of. If you hate chasing invoices, this is a godsend as it’ll be your umbrella’s job to make sure all payments are honoured on time.

Umbrellas will also deduct your tax and national insurance before they pay you, so you never have to worry about getting in trouble with HMRC. You also don’t need an accountant because all your taxation is already dealt with.

In order to cover their costs, umbrella companies will charge you a fee for processing your admin. This will usually be fixed and charged weekly or monthly. Sometimes the fee is linked to the income you bring in, which is a good deal if you’re not bringing in much, but less so if you’re getting more successful.

Do make sure you know what you’re getting into before you sign any contracts. There are lots of different umbrella offerings out there, and we’ve been working hard to find the best umbrella for you. 

In praise of slow transitioning

Contracting can be pretty tough at first and there’s nothing wrong with easing into short term gigs. An umbrella can take some of the cognitive load off you so that you can concentrate on building a client base and working out the rhythms of your new life.

You might encounter contractors, both online or in-person, who are evangelical about the benefits of running a limited company. It’s true, running a limited company is a more lucrative option than working umbrella contracts but the key thing to remember is that no-one is taking options away from you. If you choose to go with an umbrella for a while, you can still start a limited company when the time is right. This is your life – don’t let anyone rush you!