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Introduction to Umbrella Company for Contractors

Author: Josh Buffet
by Josh Buffet
Posted: Nov 06, 2017

As a contractor working through an umbrella company is the easiest way, once you have signed up there will be a minimal amount of administration. Therefore, you need to know how an umbrella company fully operates. Find out more about what is in involved and process once you sign up with an umbrella company.

It is easy to register with an umbrella company

Successfully signing up with an umbrella company, a registration form must be filled out and complete which will involve questions about you and your working circumstances (address, name, date of birth, assignment details, recruitment agency, etc.). A proof of identity and address is necessary for opening the umbrella company.

Once these forms have been completed, received and approved by the umbrella company, you just need to wait for your employment contract to start.

You will be employed by the umbrella company and not your client

Once you receive your umbrella contract, please make sure you read through it all thoroughly and are satisfied with all the details before signing and returning it. It will state in the contract that you acknowledge that you will pay your wage by the umbrella company (your employer via an overarching employment contract), they will then be accountable for paying you and making the suitable deductions.

Your umbrella company will also sign a contract with your recruitment agency, authorizing that the recruitment agency will transfer your wage to the umbrella company.

To conclude the chain of payments, your client will pay your recruitment agency, then your recruitment agency will pay your umbrella company, so your umbrella company will pay you via PAYE.

Your tax and National Insurance Contributions (NICs) will be paid on your behalf

Your tax and National Insurance Contributions (NICs) once you receive PAYE will be received through by the umbrella company. They will also conduct their margin from the payments made and you will receive a payslip with the deductions listed.

Regarding payment, you will be paid the same as a permanent employee.

Minimal administrative responsibilities

There are a few tasks that must be completed to ensure you get paid on time; the following tasks will have to be carried out. Do not fret, these administrative tasks shouldn’t take any longer than 10-15 minutes each week:

  1. With the correct information fill out your timesheets.
  2. On the umbrella online company portal upload your timesheets. These must be signed by the suitable member of staff.
  3. Forward a signed copy of your timesheets to your recruitment agency.
  4. If you have claims to be made and allowable expenses, upload the receipts to the umbrella company’s online portal.

Claiming through an umbrella is still possible, although you may not be entitled

The government in April 2016 introduced a new legislation that caused a high percentage of contractors working through umbrella companies could no longer claim tax relief on travel and subsistence. HRMC took this action because they believed a considerable number of contractors were conducting out their day to day tasks in the same manner as permanent employees. Permanent employees don't receive entitlements for the same tax relief as the self-employed and thus was seen as unjust.

Contractors that are seen to be under Supervision, Direction or Control (SDC) at their place of work, cannot claim travel and subsistence expenses. HMRC anticipate a vast majority of contractors to be under SDC. However, it is good news for contractors regarding expenses – if you are a genuine mobile worker and need to travel to random temporary locations to accomplish work, you can then claim for travel and subsistence expenses.

If you were operating through your own limited company, your take-home pay would be higher

Contractors that operate through a limited company can pay themselves with a mix of salary and dividends. When self-employed this is definitely the most efficient way of being paid. Take home pay could potentially be even more if you are outside IR35.

Once you are working through an umbrella company, you will be paid as though you are a permanent employee, irrespective of if you are inside or outside IR35 (IR35 is not relevant when working through an umbrella company). Tax and NICs will still have to be deducted as if you were a permanent employee, along with the weekly/monthly fees of the umbrella company.

Before you decide which payroll option to use speak to the experts

A personal service company or an umbrella company are the two most frequently used methods for operating as a contractor. Look for good contractor accountants who will assist you with both payroll options, along with our experts who are available to support and guide contractors through the different options say Paul managing director of PWD Roofing & Construction one of the construction companies in Oxfordshire. Therefore, you feel confident that the payroll option you choose will be the right one.

About the Author

Growth marketer. Digital strategy consultant. Consulting Audio engineer by background. Digital marketer by choice. Helping freelancers and smart companies being fully digital.

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Author: Josh Buffet
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Josh Buffet

Member since: Mar 24, 2017
Published articles: 10

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