Umbrella Companies Explained UK | Contractor Umbrella

(5 minutes to read)

Umbrella companies are an increasingly popular choice for contractors in the UK. The experts at Contractor Umbrella explain what they are and who benefits.

Umbrella Companies Explained
Umbrella companies are an increasingly popular choice for contractors and freelancers – whether they have been offering their services for years or are working in a new way due to the Covid-19 pandemic. They offer a flexible but reliable form of work which minimises unnecessary financial admin and provide a level of stability akin to regular employment. Contractors working for umbrella companies are able to choose how and when they work, without sacrificing the benefits of working for a single organisation.
In addition, umbrella companies provide a way for contractors to work without falling foul of the off-payroll working rules that prevent the use of personal service companies (PSCs). These have been in place across the public sector in 2017, and with the same restrictions set to be imposed across the private sector as of April 2021, many umbrella companies are expecting to see an increase in demand over the coming months.

What are Umbrella Companies?
An umbrella company acts as an employer for contractors and freelancers who are working on fixed-term contracts, usually of up to three months. It is an intermediary between the contractor and the client to whom they are providing their services – charging the client on the contractor’s behalf, deducting National Insurance contributions and tax at source and paying the contractor directly, just as if they were a PAYE employee. 

This means that the contractor does not have to process their own invoices or taxes, or pay the costs involved in working through their own limited company. It simplifies the entire process and ensures that payments are made in a timely, efficient and accurate manner. The umbrella company takes a monthly or weekly fee for the services that it provides, which is deducted alongside tax and NI.

In effect, an umbrella company acts as an external payroll department for the company receiving the contracted services. Most umbrella companies work via the following system:

  1. You register with the umbrella company. You will need to complete a registration form, provide valid proof of ID and in some cases supply a P45 from your previous employer. In effect, the umbrella company is now your employer, regardless of which company or companies you are working for as a contractor.
  2. You submit weekly timesheets to the umbrella company. These allow the umbrella company to calculate how much to charge the end client for the services you have provided, as well as calculating what service charge to deduct from your salary.
  3. The umbrella company invoices the client. Depending on the agreed terms, payment may take a number of weeks but you will be notified immediately when it has been received.
  4. Your salary is paid into your bank account. The umbrella company deducts NI contributions and tax at source, which means that the IR35 rules do not apply.

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Why use an umbrella company?
Umbrella companies make working as a contractor easy and straightforward, ensuring that the responsibilities of this type of employment – making sure that tax rules are followed and payments are correct – are shared and do not fall entirely on the shoulders of the contractor.

The main benefits of working for an umbrella company over traditional PAYE employment or running your own limited company are:

  • Minimal financial management, with all processing and invoicing taken care of
  • No need to worry about being inside or outside IR35
  • Standard employee benefits including sick pay, maternity and paternity pay
  • All relevant insurance provided including employers’ and public liability insurance
  • No complicated leaving process or minimum period of employment
  • Expert advice and guidance at every stage of the contractor journey.

Contractor Umbrella’s Service Guarantee makes sure that every client receives the exceptional level of service that we have won awards for and that underpins our trusted reputation.

How is take home pay different with an umbrella company?
All umbrella companies in the UK operate PAYE. In effect this means that take home pay is exactly the same as it would be if you were a contracted permanent employee, and the rules and regulations governing umbrella companies are the same.

Everyone working for an umbrella company has a tax code which determines how much they can earn tax-free. The standard tax code for 2020/21 is 1250L, meaning that you can earn £12,500 per year tax-free. Above this, tax is 20% up to £37,500, 40% up to £150,000 and 45% above £150,000. This is set out in more detail in our guides here.

This means that the only difference in pay between working for an umbrella company and working under regular PAYE employment is the service fee charged by the umbrella company, which is calculated weekly or monthly and deducted at source.

Speak to us today
At Contractor Umbrella we are experts in contractor payroll and accountancy. If you are interested in working under our award-winning umbrella company, one of our dedicated team would be happy to discuss any questions you may have. Call us today on 01206 591 000.

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