What is an Umbrella Company? Which Umbrella is Right For You?

What is an Umbrella Company?

If you are a contractor or freelancer, at some stage in your contracting journey you must have heard the term ‘umbrella’. For those new to contracting you essentially have 3 choices to work – PAYE at the agency or end client, your own limited company or through an umbrella company.

Umbrella companies have been around for years but due to the restriction imposed by S339A which restricts tax relief for home to work travel and subsistence expenses many companies were severely impacted.

First let us see what an umbrella company is and how it operates?

What is an Umbrella?

An umbrella is nothing but simply a large company with a number of employees. It engages contractors under an employment contract and offers employment rights like any other company. It then contracts out the services of the contractor to the agency/end client, collects earnings from the agency/end client and simply processes as a salary to the contractor after deducting its margin, tax and national insurance.

The contractor remains the employee of the umbrella for the series of assignment he/she undertakes and the administration hassle is dealt by the umbrella. This structure is suitable for contractors earning less than £15/hour or those who have been deemed inside IR35. An umbrella company will deliver highest take home for contractors who cannot prove that they’re self-employed.

How It Works?

Working through an umbrella can be confusing, so let’s see how it operates:

Contractual Chain

umbrella-contractual-chain

  • The contractor becomes an employee of Umbrella by signing an employment contract with a view to take assignments with the agencies/clients.
  • Umbrella enters into a business to business contract with your recruitment agency.
  • The Client for the contractor signs the Agency timesheet, which will confirm the hours/days that contractor has worked.
  • The contractor sends the signed time sheet to the Agency and also completes a timesheet for Umbrella along with any chargeable expense claims.
  • Umbrella will raise an invoice and the agency will pay the contract rate and any chargeable expenses
  • Umbrella will then process the payment to the contractor and any chargeable expenses and deduct the necessary tax and NI contributions after deducting its margin.
  • The contractor is paid via PAYE and receives a payslip.

An umbrella cannot fall under the IR35 legislation because all contractors are paid through PAYE and are not avoiding tax.

Which umbrella is right for you?

Umbrella companies have grown exponentially since the legislative changes imposed by the off-payroll public sector reforms. Working with a non-compliant umbrella can result in increased take home in the short run but you can be hit with a massive tax bill from HMRC even after 6 years. Below are the few points that you should consider before signing up:

  • Umbrella Company should assess your status regarding the Supervision, Direction and Control (SDC) on your working assignments. If you are under SDC, you will not be able to claim expenses relates to travel and subsistence tax free.
  • From 6th April 2016, no umbrella can therefore process non-chargeable expenses as tax-free due to the changes imposed by the SDC act. So technically, your take home should be same with any umbrella you join and the difference should only be the umbrella margin. A company approved for dispensation does not mean it can allow you to claim expenses that you have not incurred as any expense claim should be supported with receipts.
  • ‘HMRC Approved’ – HMRC doesn’t approve any umbrella company, all they grant is dispensation and there is no such process by which a company can get their approval.
  • Insurance – Any compliant umbrella will not charge you additional fee for providing professional indemnity, employers liability and public liability insurance. As employer it’s the umbrella’s responsibility to have adequate cover.
  • Auto Enrolment/Pensions – As an employee you should be automatically enrolled into a pension scheme when you join an umbrella service if the company as passed its staging date. You should also have the option to opt out once enrolled.

Why Choose Us?

  • Incorporated in 2005, we provide an exceptional service that you can rely on!
  • Lower margin from your earnings.
  • Various employee benefits like childcare vouchers, contractor mortgages, employee rewards portal, pensions scheme and many more.
  • Easy sign up process and a dedicated manager.

Please contact us to find out more about how our Umbrella works, how it can help you avoid falling foul of off-payroll and IR35 legislation and ensure you’re 100% compliant.

About the Author: Sumit Agarwal
A specialist accountant and tax adviser for freelancers, contractors and small businesses since 2005, He is an expert in business growth and development strategies. A renowned tax expert for owner managed businesses and contractors, He won the British Business Forum’s Young Entrepreneur Award in September 2012, presented at the House of Commons by MP Vrinder Sharma.