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To put it simply, an umbrella company has two primary functions:
1) To act as an employer to provide an efficient and accurate PAYE payroll service for contractors, while ensuring they remain compliant at all times.
2) This is the business activity an umbrella will carry out as an employer. The only income umbrella companies receive is that which is brought in by their employees, and covers all the costs related to our role as the employer.
One of the main benefits of contracting via a limited company is that it is the most tax-efficient way to operate. Unlike a permanent or umbrella employee, you pay yourself in the form of a basic salary (typically low), and the remainder is drawn down in the form of dividends. Dividends are not subject to National Insurance Contributions, which results in a significant tax saving. As a company director, you also have a great deal of flexibility over when to take income out of the company, which has further tax planning benefits, and you can also benefit by transferring some shares to your spouse (if appropriate). Limited companies pay Corporation Tax on their annual profits (at a rate of 20%), and VAT is added to all your invoices and repaid to HMRC each quarter, after allowing for any VAT you may have reclaimed on company purchases. To get started, all you will need to do is fill out the form on our Compare the Umbrella website to start the process for your new company. It is a quick process. You can incorporate directly with Companies House for under £20, although many contractors opt to leave the start-up process to one of our recommended accountants, who can also undertake a number of other initial tasks, such as setting up the company payroll, and registering the company for Corporation Tax and VAT.
Fill out the free illustration form or take the comparison quiz to receive the best option for you. If you would prefer a more personal approach by telephone, please give our client liaison team a call on 0161 464 4701. Once you've signed up to the umbrella of your choice, you'll need to provide them with proof of ID, your address and P45. They will then get in touch with your agency to request a copy of your contract. You become an umbrella employee under an overarching contract, with a view to carrying out a succession of assignments for various agencies/clients during the course of that employment. To enable you to work for an end client, your umbrella will enter into a contract with your agency. You carry out your contracted duties at the temporary workplace.
You email your timesheets to your umbrella company, and they'll invoice your agency. The agency or end client will pay your umbrella a rate the contract rate to cover payments for the work you have completed. This will also include all the costs related to your employment such as employers NICs and holiday entitlement. This rate is higher than if you were paid PAYE directly by the agency / end client, to cover these additional costs.
On the day the agency releases the funds, your umbrella company will process the payment and make deductions for Income Tax, NICs, and take a margin. The process is now completed! You'll receive a text or email when your payment is on its way.
No, but we recommend you do your research thoroughly and choose an organisation that is 100% compliant.
IR35 is the bane of contractors' lives and the thought of being investigated for IR35 abuses puts the fear of god into most people working in the contracting sector. IR35 was designed to catch people who had an employment relationship with a client but who were not paying the right amount of PAYE tax. Working for a PAYE umbrella company means you will absolutely not be affected by IR35 and it does not apply to you. Umbrella companies are safe, secure and HMRC friendly.
This question cuts to the heart of why they are becoming so popular (aside from their lack of admin and paperwork and other advantages). Umbrella companies are rock-solid, 100% safe and compliant, particularly when it comes to IR35. As you know, IR35 strikes fear into the heart of most contractors and the prospect of getting investigated (and facing massive bills and fines) is one of the downsides of working through a limited company. A PAYE umbrella company however cannot fall under the IR35 legislation because contractors are paying their PAYE and their National Insurance contributions and therefore not avoiding any tax. It was the same thing with the 2007 Managed Service Legislation, which explicitly noted that umbrella companies would not fall under the legislation. If you want security against that rainy day, get an umbrella!
Contractors can protect themselves from accidents or other disastrous events at work using various insurance policies. The majority of these policies will also cover claims for negligence thus protecting you from frivolous suits.
Since contractors provide professional advice to their clients who then rely on that advice and may even change their business plan based on it, if things don't work out, there may be financial loss that your client has to bear. In such cases, your client may decide to sue you for financial damage caused by your advice.
Having professional indemnity insurance can protect you against such legal actions. Moreover, this will indicate that you have a professional attitude towards your work, which can help you find more work in the future. The majority of providers offering these policies have created a number of cost-effective and hassle-free policies to make life easier for contractors.
If you are concerned about IR35 then yes, they are. If you work through an umbrella company then IR35 is simply not an issue and never will be. People contracting their services through an intermediary (i.e. their limited company) can face significant financial consequences if caught by IR35 legislation and can make limited companies more hassle than their worth. Umbrella companies do that from the outset - they take away the hassles of a limited company and insulate contractors from the whims of HMRC when it comes to IR35. Ever since the Managed Service Company Legislation of 2007, PAYE umbrella companies have been the one assured safe haven from IR35 and with hundreds of thousands of contractors joining them (moving over from limited companies and the old MSCs or Employee Benefit Trusts) they quickly became the one sure HMRC approved route for contractors. That's because no matter who you are contracting for, if you are doing your work through a PAYE umbrella then you are classed as an employee of that umbrella company and already paying the correct NICs and PAYE whilst taking advantage of all the expenses discounts and admin services that the umbrella company offers.
In other words, if you were already weighing up the benefits of limited and umbrella company structures and there is any chance whatsoever that now or in the future any of your contracts might attract unwanted IR35 attention, then umbrella companies become more and more appealing. This is especially true when one considers the most recent legislation in this area, the Onshore Employment Intermediaries Legislation.
In the end it is easy to see why so many people are signing up to umbrella companies. Forget that they offer similar take home pay rates for most contractors or that they mean you won't ever have to do a lot of paperwork or admin. Forget that you can claim expenses and that you can be up and running instantly (and leave just as quickly). Just think about one thing - what happens if HMRC sets their sights on you and your business? With an umbrella company you are already paying PAYE and NICs which means there is nothing for them to come after you for, be it IR35 or Onshore Intermediaries Legislation. With an umbrella company you're safe, earning well and hassle-free. Can limited companies offer the same security?