If you’re a contractor you’re bound to have heard of umbrella companies, but you may not have too much information about them, like exactly what they are and how they work, and possibly most importantly, how to avoid some dodgy ones! Here we’ll have a look at the fundamentals of umbrella’s and what you should be looking out for. They’re not as complicated as sometimes presented so let’s clear up some queries you may have about them…
Firstly, what exactly is an umbrella company?
In simple terms, they are just an alternative way to get paid as a contractor. Umbrella companies provide a payroll service to employees in the same way an employer does – but are a third party acting between the employer or recruitment agency and you, the contractor who is carrying out an assignment.
The umbrella company will sign a contract with the end client or recruitment agency and deal with all the timesheets, payroll, salary and deductions. They employ contractors, like you, working on temporary projects and invoice the client or recruitment agency on your behalf.
How do umbrella companies work for the self-employed?
In essence, for the duration of your contract the umbrella company is your employer. That means they have some legal obligations to fulfil in the same way any employer would, and you are bound by the contract of employment.
All tax and National Insurance will be deducted before you receive your pay, along with any workplace pension contributions. The remaining amount is your net pay. It’s worth noting that umbrella PAYE is usually inflated to consider additional deductions. Working in this way means you are probably going to be presented with a contract rate higher than a taxable salary.
When it comes to holiday, you will be entitled to be paid statutory annual leave (based on the hours you work) and should you leave the umbrella company with holiday owing to you, they must reimburse you for that unclaimed time.
Additionally, working for an umbrella company doesn’t mean you can’t claim expenses! There are still some that you may be able to claim from HMRC directly – either via your annual self-assessment tax return, or by contacting HMRC to have your tax code adjusted accordingly These include things like uniforms, professional subscriptions and a working from home allowance if applicable.
What is the difference between an Umbrella company and Agency PAYE?
The key difference is that with agency PAYE, your contract ends when their contract finishes with their client. With an umbrella company there is continuous employment which helps with things like applying for a mortgage or credit.
There are many similarities – both umbrella companies and agency PAYE will take care of your payroll and admin, but with umbrella you could be entitled to certain work-related expenses, pension schemes and medical health plans.
Take home pay: Umbrella Company vs Limited Company
In general, the take home pay via a limited company with an outside IR35 contract, will be more than via an umbrella, however we appreciate that every circumstance is different, and they are two very different ways of working. As outlined, when you work for an umbrella company you are basically a contractor that gets taxed as a permanent employee, whereas a limited company will be liable to pay other expenses such as corporation tax and VAT, which in turn can benefit your tax efficiency. We’ve put together a list of the advantages and disadvantages of working this way here.
How are umbrella companies impacted by IR35?
The aim of the IR35 rules is to stop contractors avoiding tax by ensuring they are treated in the same way as a clients’ own employees. This means that IR35 doesn’t impact Umbrella Companies in the main as you will already be paying tax and National Insurance. In short, if you’re employed by a compliant Umbrella company you won’t get caught by IR35.
If you are unsure whether your status is inside or outside IR35 then take advantage of our FREE IR35 review service – a comprehensive report provided to you instantly.
As always, when making important decisions about your business, talk to an Accountant who will advise you, impartially, as to the most efficient way for you to work be that as a limited company, through an umbrella company or with agency PAYE.
How do you spot a dodgy umbrella company?
You’ve heard the expression “if it sounds to be good to be true it probably is”? Bear that in mind when listening to the claims of a Mini Umbrella Company (MUC).
They will very often tell you that you will have a higher take home pay by reducing PAYE, national insurance and VAT. But (and it’s a big one) by doing that they are putting your business at risk through their non-compliance. In no uncertain terms, if an agency is using an MUC it is putting you at risk by fraudulently using the VAT flat rate and employment allowance schemes and the result may be that you are left with unpaid tax bills that HMRC could investigate.
There are a few common signs to look out for and by doing so, you should be able to avoid a dodgy umbrella company, so take note…
- Look out for an unusual company name or business address that doesn’t sit well with the type of business activity they are offering
- Check them out on Companies House to see if the services they are offering matches their description as it appears there
- Be wary if the Company directors have no previous experience in the UK labour supply industry
- Look at their business lifespan, particularly if it is less than 18 months.
What umbrella company should I use?
Look out for companies that are FCSA accredited. The FCSA is the Freelancer and Contractor Services Association and recognised as the industry’s compliance gold standard. Accredited members are able to demonstrate the highest standard of compliance in the professional services sector and been independently audited. Going for an umbrella company that is FCSA recognised minimises risk as they have gone through stringent testing.
Who do Integro Accounting recommend?
We have a partnership with Clarity Umbrella who have full FCSA accreditation. In addition, they offer no sign up or exit fees and offer first class customer service and same day payments as standard. For more information on each take a look here Clarity Umbrella.
What’s more, we offer what we like to call an ‘Easy Switch’ package because it is exactly that. We completely understand that ‘one size doesn’t fit all’ and circumstances can change. This package is designed (and ideal!) for contractors who want the flexibility of working both inside and outside of IR35 and allows you to keep your limited company open whilst taking advantage of our payroll umbrella company partner.
In conclusion, umbrella companies don’t need to be complicated – think of them a bit like an employee, but like all employees there are good ones and bad ones so make sure you do your due diligence to avoid the bad ones.
If you would like some advice on the best way of working for you, speak to one of our friendly Accountants here at Integro, call 0207 0962659.
