What Is An Umbrella Company And How Can They Help You?

Umbrella's are very handy objects; they keep you dry when it's raining, and cool in the searing heat. But this is not the kind of umbrella I'm talking about.

Now we all love Rihanna's hit single, with its banging beats and catchy lyrics, and although Rihanna is always a tasty subject, unfortunately it's not going to be the topic of this article.

While we all appreciate and love both the umbrella with the rain stopping frame, and the 'Umbrella' of chart-topping fame, the umbrella in question here is something far more important from a financial and employment point of view.

For contractors employed through an agency on a fixed term/contract assignment, often they are brought in as a means for the employer to avoid the burden of various legal requirements involved with permanent staff such as sick pay, national insurance contributions, or PAYE.

For the contractor this can be a bit of a turn-off. The prospect of no sick pay, travel expenses, or pension contributions is not ideal. This is where an umbrella company comes in.

The latter acts as the employer of the client (the company for whom the work was completed), and provides payroll services for the contractor. The umbrella company bills the agency, who in turn bill the client.

Confused? You shouldn't be, it's really quite simple. The umbrella company acts as an intermediary between the contractor and the agency, ensuring that both parties are kept happy; the agency is paid by the client, and the contractor does not lose out on the benefits previously reserved for permanent employees of the client.

Other benefits of involvement with an umbrella company include; food and accommodation allowances, mileage and other travel expenses, and insurance cover for contractors. With such companies, you can expect to be paid on time every time, rather than waiting for your time-sheet to be processed by the agency.

Whilst those contractors who use an umbrella company reap the financial benefits of this association, there are several means by which people attempt to avoid tax in other ways. By setting up or using offshore companies to reduce tax liability for contractors, or by working through a composite company, contractors are indulging in tax avoidance and as such, expose themselves to the long arm of the law.

Whilst they don't guarantee to keep you dry, or entertain you with some modern pop, umbrella companies will protect your interests, and will leave you with a smile on your face at the end of the day.