In the UK there are companies which are known as umbrella companies and they have this name because they will list contractors and freelancers as being their employees, enabling them to come under the ‘umbrella’ of a larger company. By being part of this umbrella company, a contractor, for taxation purposes, is classified as an employee of the company and is therefore permitted to make claims for expenses, something they would not be able to do if they were to remain just self-employed. This is a recognized practice in the UK and so is totally legal and enables contractors and freelancers to retain higher profits from their work. The best UK umbrella company or companies will also save a contractor a great deal of administrative work as, as the employer, the umbrella company will take responsibility for payment of a contractor’s worker’s wages, applying taxes and NI contributions as necessary and will also create all the invoices for the contractor’s clients.
Along with raising the invoices, the umbrella company will also make the collection of those payments and having taken out their fee, deposit the remainder in the contractor’s bank account. In order for the company to do this of course, the contractor will have to provide the umbrella company with their bank account details and their workers’ weekly timesheets. With the contractor only having to provide timesheets and not having any other hassles with wages and, not having to raise or collect payments on invoices, they have extra time to ensure that any jobs they are currently working on are being carried out smoothly and may even have extra time to find additional contracts to work on, affording them even higher profits. There is another option a contr5actor could choose in order for them to be eligible to make claims for expenses and that is to make their business a limited company. Although with a contractor being a limited company they may be able to submit even more claims for expenses, the extra claims are the only benefit that a contractor receives from this option.
As a limited company, the contractor will still be responsible for their workers wage payments including the necessary tax and NI deductions. They will also still be responsible for creating invoices for their clients and collecting payments on those invoices. Added to that is the extra administrative details necessary to ensure that the contractor maintains their limited company status. As most contractors would rather be in the field overseeing their workers than sitting in an office dealing with administrative chores, they prefer to be part of a larger umbrella company even though that may mean they cannot make quite so many claims. Being part of a larger umbrella company is proving to be beneficial to offshore contractors as well as those based only in the UK and so there are now many umbrella companies in the UK from which a contractor or freelancer can choose to become part of in order to make their claims for expenses.