What is an Umbrella Company?
If you are a contractor, you client might tell you they wish to engage you through a limited company. So what options do you have?
Basically there are 2 options, use an umbrella company or set up your own limited company.
An umbrella company acts as an intermediary between you and your client. You become employed by the umbrella company, you submit your timesheet, they invoice your client and pay you an amount net of tax, national insurance and their fees having taken into account the allowable deductions. (which is limited by HMRC rules.)
As you become an employee of the umbrella company you will also receive employee benefits such as sick pay.
All umbrella companies operate PAYE and are all governed by the same HMRC rules so the only difference in your take home pay should be their margin.
Own Limited Company
If you go down this route you become a director of your own limited company and can therefore take advantage of the variety of ways of minimising your tax bill. The downside is that you are responsible for your own tax affairs and ensuring that you comply with the rules of running a limited company. You also need to consider the IR35 rules.
As with most things in tax, there is rarely a one-size fits all solution so it is important that you get specialist advice to make sure you are doing all you can to maximise your tax home pay taking into account of the factors.