Most people will only come across an umbrella company if they are in a contract so do not worry if you are feeling a little confused. Whilst you are carrying out your research you may also come across various terms for an umbrella company such as a contract umbrella, contract umbrella company, contracting umbrella company, contractor umbrella company, IT contractor umbrella, IT contractor umbrella IT umbrella company, Limited umbrella, Ltd umbrella company, umbrella companies IT, umbrella limited companies, & umbrella limited company.
Whatever the terminology, in its simplest form, an umbrella company processes a PAYE payroll for contractors whilst offsetting business expenses against their tax, without having to worry about the IR35 legislation.
An umbrella company is a company that acts as an employer to contractors who are in a contracted assignment, usually through a recruitment agency. Recruitment agencies issue contracts to a limited company as the agency liability would be reduced.
Your umbrella company will liase with the agency / client to ensure that all details have been gathered so that all the contracts, documents and schedules are on file. Your details will also need to be collected to clarify your identity and to ensure that you get paid.
Your chosen umbrella company will issue you with an employment contract once your contract has been secured, which will provide you with an employee status.
You may be asking "How do I get paid?" The umbrella company issues an invoice to the recruitment agency (or client) upon receiving a timesheet from the contractor. The recruitment agency will pay the umbrella company, who will in turn pay the contractor through PAYE with the added benefit of offsetting some of the income through claiming business expenses such as travel, meals, accommodation and work equipment. As employees, contractors working through umbrella companies are also able to become more tax efficient by utilising salary sacrifice schemes such as childcare vouchers, pension scheme, mobile plan, charity donations and a Bike to Work Scheme. As employees of the umbrella company, contractors should be entitled to benefits such as professional insurances, discounted training courses, shopping discounts and health insurances.
If the agency / client have agreed that business expenses will be reimbursed, then your umbrella company will invoice (better known as a 3rd party invoice) the agency / client once the expense receipts have been submitted. The agency / client will pay the umbrella company, who will in turn process payment to the contractor.
As your employer, the umbrella company will apply a relevant tax code once a P45 or P46 has been submitted. Once submitted, the umbrella company will be able to maximise your personal allowance and contractors will receive a payslip to support their payroll. As an employer, umbrella companies will also produce a P60 at the end of the financial year and a P45 once employment has ended.
As an employee, the contractor is entitled to employment rights such as holiday & sickness pay, maternity & paternity leave, minimum wage, etc.
Umbrella companies have become more of a requirement since the British government introduced IR35 legislation in 1999. Umbrella companies are a hassle free way of working whilst allowing contractors to increase their take home pay compared to being paid PAYE through the recruitment agency or client. See how much more you can take home by using our free umbrella salary calculator.
To speak to one of our tax experts call 0800 434 6402.
