What comes first when using an umbrella company, then second, third, fourth and so on

Moving from a permanent job to contracting is a big change, involving handling different contracts, clients, agencies and arguably the most opaque of all, umbrella companies.

It gets even more complicated when contracts fall into different IR35 categories. Managing this transition involves staying HMRC-compliant, planning your finances well, and more often that not, utilising umbrella companies when it’s appropriate to do so.

Here, exclusively for ContractorUK, I want to provide a step-by-step guide -- and in the order of taking those steps, to managing multiple-contracts when wanting to work effectively and efficiently through an umbrella company, writes Shelley Ankers-Wainwright, founder of Umbrella Ready.

Securing Your First Contract

Step 1: Identify Your IR35 Status

Inside IR35: If your contract is inside IR35, your income is treated as employment income.

So when inside IR35, taxes and National Insurance Contributions (NICs) must be deducted at source.

Outside IR35: If the contract is outside IR35, you have more flexibility in managing your income and expenses.

Step 2: Choose an Umbrella Company

Your recruitment agency may suggest an umbrella company. While they can absolutely recommend an umbrella company in this way, you have the freedom to choose your own umbrella.

The umbrella company acts as your employer, handling tax deductions and payments to HMRC.

Working through an umbrella company

Step 3: Sign Up with the Umbrella Company

Next, complete the necessary paperwork to join the umbrella company.

The umbrella company will process your pay, deducting taxes and NICs before you receive your net income.

There are no joining or leaving fees with a compliant umbrella company, and you can join a new umbrella company at any time.

Step 4: Receive Payment

Your umbrella company will deduct their fee, known as a margin (typically between £10 and £30 per week) from your gross pay.

The margin covers payroll processing and administrative tasks, as well as being covered by the umbrella's insurance policy.

The margin is deducted on a ‘pay as you go’ basis, so you only pay for the weeks you work.

This is partly why umbrella companies have come to represent a flexible solution for contractors.

Completing and Securing New Contracts

Step 5: End of Contract

When your contract ends, you can either stay with the same umbrella company for your next contract, or switch to a new one.

If you’re happy with your current umbrella company, ask your new agency if you can continue using them.

Step 6: Switching Umbrella Companies

If you decide to switch from one umbrella company to another, request your P45 and importantly, make sure you ask to receive any accrued holiday pay from your current umbrella company.

Next, ensure your agency or end-client directs future payments to your new umbrella to avoid delays in your pay.

Managing Multiple Contracts and IR35 Statuses

Step 7: Handling Multiple Umbrella Companies

You can use two umbrella companies simultaneously; think of it in the same way as having two jobs.

The income from the second job would be taxed at the basic rate using the 'BR' tax code if your personal allowance is already utilised.

Alternatively, it would be worth consolidating your contracts under one umbrella company which would simplify your finances and reduce administrative hassle.

Step 8: Balancing Inside IR35 and Outside IR35 Contracts

For inside IR35 contracts, use an umbrella company to manage taxes and NICs.

For outside IR35 contracts, consider setting up a limited company (also known as a Personal Service Company - PSC) to optimise your tax-efficiency, using salary and dividends.

Step 9: Combining Services

Some contractor service providers now offer combined services where they handle both your umbrella and PSC accounting needs. Potentially, this offering is a free umbrella service, if you also have a PSC and use the provider to do your accounts -- most likely for outside IR35 assignments.

This two-fold solution from a single provider can help you manage costs and will also help keep switching between umbrella and limited company arrangements straightforward.

If you anticipate switching between payment methods -- i.e. using both an umbrella company and a limited company, it's worth shopping around. Otherwise, you will most likely end up paying both umbrella margins and accountancy fees unnecessarily.

Step 10: Write a Review

Whoever you’ve used, and almost regardless of your experience, write a review of the provider on a reputed umbrella company review website, so other contractors can know where to go, who to use or what to look out for.

In review…

In summary, moving from a permanent job to contracting, especially with contracts under varying IR35 statuses, can be simplified by using umbrella companies. Understanding your IR35 status, picking a dependable umbrella company, and managing contracts and payments effectively are crucial for a successful contracting experience.