What Exactly Is An Umbrella Company?

The guide to PAYE Umbrella Companies


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Basically an PAYE umbrella company is a company that acts as an intermediary between the contractor and their clients. The chief purpose of an umbrella company is therefore to handle all of the administration associated with contracting (particularly payroll, taxation and invoice administration) so that the contractor is free to concentrate on the contracting itself. The client will pay the umbrella company who will take care of the contractor’s PAYE and NIC’s before passing the remainder onto the contractor.More information about the main areas of the Umbrella Company structure
Table of contents
Guide to Choosing an Umbrella Company
Myths and Misunderstandings Surrounding Umbrella Companies
Managing the Finances
Has The Limited Company Had Its Day?
Why use Umbrella Companies?
How to move from a Limited Company to Umbrella

Read more: The guide to PAYE Umbrella Companies

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How Popular Are Umbrella Companies?
Umbrella companies are incredibly popular with contractors and have been around for a long time. However since legislation in 2007 declared that umbrellas were in a different category to single person companies and composite structures umbrella companies have become more popular still, particularly as they are seen as the only secure and HMRC-friendly alternative to a limited company. Whereas Managed Service Companies and Employee Benefit Trusts (and many other taxation vehicles) have provoked the displeasure of the taxman and been knocked back, umbrella companies remain a sure and safe way to cut back on the paperwork of a limited company whilst maximising income retention. It is for this reason that there are currently more than 200,000 people working in the UK through umbrella companies, with more and more joining every year.

How Do Umbrella Companies Work?
Perhaps the best way of explaining how they work is to show what happens from a contractor’s perspective:

Firstly, the contractor would join an umbrella company (preferably Hamilton Bradbury ☺) by signing on at their website or talking to them on the phone. You would then sign on with the umbrella company via an employment contract between them (as employers) and you, the contractor (as employee). You would then work your contracts as normal and at the end of the week you would submit both your expenses and your hours worked to the umbrella company via an online portal. Then behind the scenes while you work (or relax) your umbrella company would take care of invoicing the client and collecting the payment (and chasing the payment if it is late). Finally, they would then pay you via PAYE and take care of your National Insurance contributions, after first deducting expenses.

Flowchart of Umbrella Employment without an agency 


Are There Significant Tax Advantages to Working with an Umbrella Company?

Yes. In addition to saving you a great deal of hassle when it comes to administration many umbrella companies also offer a number of ways to maximise income too. One example is expenses – though using an employer / employee structure the contractor will usually be working at various different locations and these will be classified as temporary workplaces which means the contractor can offset subsistence and travel costs on getting to and from that site and on costs incurred on site. This will in turn reduce the contractors gross salary and how much tax they pay.

What About IR35?
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. Introduced in 2000 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 an 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.

Read more about compliance in place for PAYE Umbrellas

Changes to Travel and Subsistence

The government will introduce legislation in the Finance Bill 2016 under S339A ITEPA 2003, to restrict tax relief for home to work travel and subsistence expenses for works engaged through an employment intermediary. This will mean the rules are the same as for employees.

The changes take effect from 6th April 2016 and restrict the claiming of taxable reliefs on benefits claimed through PAYE known as Salary Sacrifice arrangements, which is the way we claim your tax relief through the Hamilton Bradbury Umbrella.

Generally, employees cannot claim relief on their regular commute from home to work and back, the introduction of legislation is to ensure that only eligible workers can claim this relief.

The S339A legislation is also known as IR35 and has broad scope. As a worker who is an employee of an Umbrella Company you are not caught by IR35 because the employment is taxable under PAYE however, the new rules SDC have to be applied when expenses are claimed.

Treasury stands up for the Umbrella

During Monday’s parliamentary questions there was a written question of Conservative MP to Aberconwy Guto Bebb  “what steps his Department is taking to stop agencies using umbrella companies to manage the payroll function of companies within the construction industry” The question fro Guto Bebb some after the Welsh Assembly stepped in and banned contractors working on […]

Guide to Choosing an Umbrella Company

Right now, you’ll discover Umbrella Business promoting as much as 85 % retention of your earnings. That sounds pretty good however not when you understand what’s really going on. The method they do this is by motivating you to claim un-receipted costs or automatically including an un-receipted meal allowance of up to £36 daily.

Myths and Misunderstandings Surrounding Umbrella Companies.

Regardless of the fact that working via an umbrella business is now an accepted and popular practice among contractors, there are still many individuals out there in the contracting/freelancing community and beyond who do not understand exactly what umbrella businesses are and how they work– or the benefits they can bring. Indeed many contractors still swelling umbrella companies along with Managed Service Companies and other intermediaries as part of the group that frequently gets its’ collar felt by the guys at HMRC. In truth, as we shall see, the reverse is real and umbrella companies are quick ending up being the default and most protected method for service providers to manage their profits. This post will certainly look at a few of these misunderstandings and misconceptions and discuss why it is that umbrella business have actually ended up being so popular:

Managing the Finances

If you are contracting in the UK, you could be dealing with two different monetary situations.

Working via a Limited company: You will certainly be paying yourself a monthly salary.
Inside IR35: If within IR35, you just need to pay yourself a deemed salary.

Operating PAYE means that you won’t need to fret about earnings tax and NI contributions. These deductions will certainly be instantly made as soon as your accounting professional processes your payroll.

Claiming expenditures is easy when you are resolving a limited company. You can assert all overhead simply like any other business, consisting of company equipment, training, and other expenses. On the other hand, contractors inside IR35 will only be able to assert a 5 % allowance in lieu of overhead.


Has The Limited Company Had Its Day?

For several years now the first choice a contracting had to make when going into the contracting sector on their own was to choose which type of tax cehicle was the most suitable for their purposes. And typically most service providers inevitably chose the Limited route. However, as we will see, the ongoing intro of ever more limiting tax legislation relating to professionals has made the choice less and less clear cut and in reality, made the umbrella business more favorable with each new law. And with the arrival of the much-despised IR35 regulation (and more recently the new Onshore and Offshore employment policies) the umbrella business has swiftly becoming the tax setup for many contractors. That stated, the field is still quite uniformly split and new specialists pertaining to the sector attempting to decide whether they need to go Limited or work via an umbrella are still dealing with a challenging call. This post will attempt to clear some of the choices involved and ask whether, due to all the new guidelines, the Limited Business is still worth it?

Why use Umbrella Companies

Why use Umbrella Companies

Regardless of having actually been around for years, umbrella business are still the only video game in town when it concerns rock-solid, HMRC friendly tax options for professionals. Along the method umbrella companies have seen off Managed Service Companies, Offshore Solutions, EBT and numerous other Solutions. When it concerns cutting out admin and paperwork and increasing take home pay, umbrella companies are still where it’s at!

How to move from a Limited Company to Umbrella

If you’re thinking about moving from a limited company to an umbrella company then it’s probably safe to assume you’ve been contracting for some time and have an idea of the advantages that switching to an umbrella offers. Here at Hamilton Bradbury we’ve found that most of the contractors who come to us from limited […]


Background On 8 March 2001 the European Court of Justice (ECJ) provided a ruling in the Hoechst and Metallgesellschaft cases (joined cases C-397/ 98 Metallgesellschaft Limited and Others v CIR and HM Chief law officer and C-410/ 98 Hoechst AG and Hoechst UK v CIR and HM Attorney general of the united states). The complaintants, […]

How Does Tax Get Paid in an Umbrella Company? The reason that umbrella companies such as Hamilton Bradbury are proving so popular with contractors nowadays is because they offer a HMRC friendly way of minimising admin and paperwork whilst still managing to offer some decent tax advantages to the contractors they employ. A contractor joins Hamilton Bradbury or a similar umbrella company (instantly by phone or website) and then signs an employment contract with that umbrella company. They become the employers of the contractor who then goes about their contracting business as usual. The contractor works contracts as they have always done but instead of having to fill out all the paperwork and do all the admin associated with a limited company and having to send out invoices and chase payments, all they need do now is submit a form with hours worked and expenses incurred at the end of the week. After that, the umbrella company takes care of everything (including sending the invoice and collecting the payment) before then paying the contractor via standard employee PAYE and NIC's, deducting expenses first. Though seen as being advantageous more for the freedom they bring to contractors and the lack of paperwork (not to mention all the employee benefits) umbrella companies also offer many tax advantages too. One of the main ones comes in the form of expenses that allow the contractor to offset significant travel and subsistence costs against their gross pay. One of these expense allowances is in the form of a very generous tax break on pensions wherein the contractor also saves a great deal of money on income tax and NIC’s. Also another tax advantage is that umbrella company contractors will never find HMRC at their doors with an IR35 investigation into tax avoidance. IR35 legislation, as well as onshore intermediaries legislation, has no relevance to contractors paying tax through an umbrella company.