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What Exactly Is An Umbrella Company?
The guide to PAYE Umbrella Companies
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
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.