A senior journalist for the online small business publication Real Business has clarified why independent professionals working on a series of short-term contracting assignments should opt for Umbrella Companies if they do not wish to run their own personal service companies (PSCs).

Shané Schutte, who specialises in employment and business law, disentangles the distinctions between Umbrella Companies and agency PAYE options.

Many people contemplating contracting as a career may have been confused by Labour’s election manifesto pledge to abolish Umbrella Companies.

Labour was adopting an approach favoured by some trade unions, who had claimed that workers’ rights were being denied by Umbrella Services. This was robustly demolished by Julia Kermode, the CEO of the UK’s largest Umbrella Company trade association, the Freelancer and Contractor Services Association (FCSA)

Ms Kermode denounced the bad practice of a small minority of non-compliant Umbrella Companies, something that the FCSA had been keen to expose. However, she insisted that it was a gross error to tar all Umbrellas with the same brush.

As she put it at the time: “Corbyn and others clearly don’t understand how Umbrellas work. Umbrellas allow contractors to be able to work independently for a number of end hirers and provide contractors with full employment rights, all statutory benefits including holiday pay, maternity pay, paternity pay, sickness pay, pensions, redundancy pay and adoption pay. It would be foolhardy to ban Umbrellas unilaterally considering that this sector is worth in excess of £3bn in tax and National Insurance Contributions to the Exchequer annually.”

Ms Schutte agrees. Both Umbrellas and recruitment agency PAYE options, she writes, pen their contractors as employees, a status that carries some valuable advantages such as taking care of payroll and administrative burdens. The key distinction between a well-run, compliant Umbrella Company and an agency PAYE scheme is that the former provides all 84 statutory benefits and employment rights to its employees. These include crucial rights such as paid holiday and sickness leave as well as maternity and paternity pay. Someone paid through a recruitment company is classified as an “agency worker” and will, by contrast, be granted only 29 rights.

People who are simply looking for some short-term seasonal work to boost their incomes may be well advised to opt for a recruitment agency. However, for independent professionals (Schutte gives the example of supply teachers) who may work in a range of different settings and take on a succession of short-term projects, the Umbrella option is undoubtedly superior, as it consolidates all income streams into one payment as well as providing a pension pot and a single tax code.

Umbrella Companies, in short, are a wise choice for contractors.

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