An umbrella company is relevant to contractors and freelancers who may take on a short-term contracts or it is a structure that can be used if you are new to contracting and are looking for an easy set-up option to start working and getting paid quickly.
What is an umbrella company?
An umbrella company is a separate limited company that acts as an employer for contractors and freelancers working on fixed term contracts. Umbrella companies also serve as intermediaries between the contractor and their end client or agency.
Umbrella companies have flourished over the past decade in the UK, and can offer a hassle free business structure to operate under for contractors working in many industries.
The main role of the umbrella company is to provide a vehicle for contractors and freelancers to be paid via Pay As You Earn (PAYE), and looks after all related payroll services including processing of timesheets, requesting invoices from the end client, and most importantly paying its ’employees’ in other words, contractors and freelancers, their salaries. Salaries are paid by the umbrella company after tax, national insurance and the umbrella company fee is paid.
How does an umbrella company work in practice?
Here are the steps you will take if you join a UK-based PAYE umbrella firm:
1. Sign a contract with your chosen umbrella company – Once you have secured a contract role, the umbrella company (as your ‘employer’) signs a contract with your recruitment agency. You will then sign an employment contract with the umbrella company and become an employee of the umbrella. Choosing the right umbrella company for you is an important choice and in particular you need to watch the fees charged by an umbrella, which will be deducted from your take home pay via PAYE
2. Timesheets – it is standard process and required that you log time worked on a contract once a week and submit this to your agency. Your agency will need this information to invoice the end client so you are duly paid for work completed.
3. Wages – You will receive your salary entitlement for work completed after tax deductions, National Insurance contributions and an umbrella fee. Your umbrella company will send you a payslip just as an employed, permanent worker would and wages are paid int your bank account on a regular basis.
Can I claim for expenses working under an umbrella structure?
At the end of each tax year, which runs from 6th April to 5th April each year, you can reclaim the cost of expenses against your income tax bill.
You can reclaim the cost of any legitimate business expenses you incur as a contractor depending on whether your contract is deemed to be under the ‘Supervision, Direction and Control’ (SDC) of your client.
If your contract work is caught by the SDC rules, you cannot reclaim the costs of travel and subsistence.
You can read the official background to the SDC rules, which took effect from April 2016.
Should I set up my own limited company instead?
There are benefits to both an umbrella structure and a limited company structure and there are various considerations to take into account. You can read our guide on the benefits of moving to a limited company structure here first to make an informed decision.
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Written by Shaima Todd.