When contractors and umbrellas are used in the same sentence, the umbrella does not refer to a device that stops the rain but instead to an umbrella company that allows a contractor to make more claims for expenses on their taxation documents. As a self-employed contractor, the number of tax claims that can be placed against expenses is very limited but that is not the case if the contractor was either a limited company or part of a larger company. This means that for a contractor to make the most profits they can, they either must register as a limited company or consider becoming part of a larger company; an umbrella company. Umbrella Companies are companies that register contractors as being in their employ and as an employee, allowing the contractors to make claims against many of their expenses. If the contractor instead opted to become a limited company, they would also be able to make claims against their expenses and possibly even more claims than if they were part of an umbrella company but, as a limited company the contractor would commit themselves to added paperwork and other administration tasks which is not the case when becoming a part of an umbrella company.
As a registered employee of the umbrella company, the contractor can expect the umbrella company to pay their workers and so only provide them with weekly timesheets for those workers which are to be paid. The contractor can also expect the umbrella company to create all their relevant invoices and collect payments against those invoices. Administration tasks are often not a contractor’s strong point when it comes to skills and so by having professional administrators taking care of those administrative duties is an added bonus. Of course a contractor could employ their own accountant to deal with their administrative tasks but that would likely cost them as much, if not more than the fees to become part of the umbrella company and besides, having their own accountant would do nothing in qualifying them for extra expenses. Even if a contractor is considered to be an offshore contractor, they can still take advantage of the many benefits being part of an umbrella company can provide.
Umbrella companies therefore offer contractors or freelancers, the opportunity to receive the benefits afforded limited companies without actually having to become their own limited company with all the extra paperwork and regulations that that would involve. Needless to say umbrella companies in the Uk are a popular choice for contractors in the UK especially as the inland revenue services are aware of the umbrella companies and accept them as valid companies for contractors to become part of. With the lack of paperwork and administrative tasks that a contractor that has become part of an umbrella company has to face, the contractor finds that they have more time available to ensure that any jobs they have in hand are being correctly completed and extra time to look for the next contracts.