We have put together some umbrella company information for you, to include explanations of some words you may come across along with some answers to your questions.
Umbrella company
An umbrella company is a company who processes a PAYE payroll for contractors whilst offsetting business expenses against their tax, without having to worry about the IR35 legislation.
Limited Company
Contractors can choose to set up their own Ltd company to control their financial affairs whilst they are contracting. However, contractors are solely accountable for their own payroll and tax affairs.
Composite company
Working through a composite company is generally regarded as a tax avoidance process. And the Finance Act 2004 means any tax avoidance schemes have, by law, to be reported to HM Revenue & Customs.
Offshore company
There are many territories where tax rates are lower than in the UK, and some contractors use intermediaries like offshore companies to reduce their tax liability. But offshore schemes designed for tax avoidance must register with HMRC, so they'll know exactly what you're up to. Some of these are tax evasion schemes and they are illegal.
IR35
IR35 is the way in which the taxman closed a loophole that was allowing many contractors and freelance professionals to avoid paying large amounts of tax and National Insurance Contributions (NICs).
PAYE
The Pay As You Earn (PAYE) system is a method of paying income tax and national insurance contributions. Your employer (umbrella company in this case) deducts tax and national insurance contributions from your wages or occupational pension before paying you your wages or pension.
An employer (umbrella company) is responsible for sending the tax on to HM Revenue & Customs (HMRC). Each pay day you will get a pay slip setting out your pay, tax and national insurance contributions and any other deductions from your pay.
P11D
Your employer (umbrella company) uses a P11D to tell HMRC about the value of any 'benefits in kind' they've given you during the tax year. This means benefits or expenses that effectively increase your income.
P60
At the end of the tax year, you will get a P60 form from your employer (umbrella company) which sets out the total amounts paid to you and deducted from you for the previous tax year.
P45
Your P45 is a record of your pay and the tax that's been deducted from it so far in the tax year which shows your tax code and PAYE (Pay As You Earn) reference number; your National Insurance number; your leaving date; your earnings in the tax year; how much tax was deducted from your earnings.
P46
If an employee (contractor) does not have a P45 form available, a P46 form is completed by the employee (contractor) and the new employer (Umbrella Company) to notify HM Revenue & Customs of their new employment.
For more details regarding umbrella companies, request Tarpon's free umbrella company pack.
To speak to one of our tax experts call 0800 434 6402.
