Freelancers' Questions: Should a sole trader join an umbrella company?

Freelancer’s Question: All my income is as a self-employed sole trader, but I’ve been offered two days work via a recruitment agency on the basis, I’m told, I join an umbrella company.

If I join the umbrella, would they become my main employer and would sole trading become secondary? If so, how does this affect my tax-free allowance, since I would only be making a tiny amount (one job) of money via the brolly? Responses from the brolly were not ideal I note -- they seemed like robots, only giving me pre-programmed answers! Please advise.

Expert’s Answer: Well for the purposes of employment law, your umbrella company would legally be your employer, then any work that is undertaken as a sole trader, defines you as just that; i.e. self-employed. The umbrella company has to provide you with a contract of employment and will have to, by law, provide you with statutory entitlements such as sick pay, maternity pay and paternity pay, giving you legitimate ‘employment' status.

However, for the purposes of taxation, you are able to declare the income via the umbrella as a secondary employment, which means it would be taxed in full, thus applying your tax-free allowance to the self-employed work.

So let’s look at your situation. If, in fact, you simply have two days’ work, then this is not conducive to working via an umbrella company. Indeed, working this way should never have been recommended to you as an option. If you were to pursue it, you would need to be set up as an employee, with signed contracts and right-to-work checks being completed. This would seem ludicrous for such a short period of work!

Also, most umbrella companies have a minimum period in which they would employ you for; most with at least a week, if not four weeks (the norm for an employment contract), that they would have to honour in order to comply with their contract of employment notice period.

It is of concern to me that you are even being asked to go down this route based on your circumstances, and of further concern that an umbrella company is unable to naturally explain the way in which your taxes would (or could) be applied. In your situation, it would seem that the much more logical step is to look at joining the recruitment agency’s payroll and being paid PAYE, that is; if they have an in-house payroll team.

The expert was umbrella company industry veteran Lucy Smith, the owner of Clarity Umbrella

More on Umbrella Companies for freelancers


26th March 2017

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