Joining an umbrella company can be the best way forward for new contractors who aren’t ready to become a limited company, or who aren’t sure how long they’re going to be in the business for – but what exactly is an umbrella company?
Keep reading for a simple guide on umbrella companies, including simple steps on how umbrella companies work.
What Is An Umbrella Company?
An umbrella company (aka PAYE umbrella company) is a standard UK limited company that is operated by a third party.
The third-party acts as an employer on behalf of its contracted employees and works as an alternative to setting up and working through a solely limited company.
In essence, it’s a company that self-employed contractors can join instead of setting up and working via their own limited company.
Joining an umbrella company essentially makes you their employee – the umbrella works as a middle ground between yourself and your client or your recruitment agency.
The umbrella company will deal with the administration side of business such as taxes or accountancy.
All timesheets and invoices will be handled by the umbrella company, which can help to relieve you of the responsibility of running your own personal service company and give you time to focus on the more interesting and important aspects of the job.
Umbrella companies handle the payroll and pay using PAYE, deducting costs such as national insurance contributions, workplace pension contributions, and taxes – which is a sure way to streamline the entire payroll process and take some weight off your shoulders.
If you’re a contractor, you can work on contracts inside or outside IR35 – the IR35 status applies to contracts rather than the contractor.
This means that some contractors that only work inside IR35 may decide to use an umbrella company as a way to reduce the tedious admin work required.
You can also run a limited company while using an umbrella at the same time, as well as work on inside IR35 contracts while running a limited company.
How Do Umbrella Companies Work?
- The first step is signing the contract – your recruitment agency will sign a contract with the umbrella company as your employer. You will also sign a contract of employment with the umbrella company.
- Once the contract has been signed, you’ll agree a time to be on site and complete a timesheet, to then be handed to your manager. This timesheet should be submitted to both the recruitment agency and your umbrella company, to show how many hours you’ve worked in that space of time. It will typically need to be submitted every week or every month, depending on the timesheet.
- The next stage involves the umbrella company invoicing the recruitment agents, which bills the end client. When the umbrella company has been paid by the agency, they’ll get you prepared for payroll.
- The umbrella company will then process your payroll details and ensure you get paid your salary. This will involve deducting taxes, pension plans (if applicable), and national insurance. In this stage, you’ll also get reimbursed for any pre-agreed expenses that you may have incurred.
- Finally, you’ll receive your payslip which will let you know your take-home pay as well as any deductions.
Why Use An Umbrella Company?
Running a limited company can be a difficult task, and very time consuming, so it’s not always the best option for contractors.
If you’re a new contractor, you may be put off by the hassle of establishing a limited company straight away – and if you’re not sure how long you’ll be contracting, it most likely isn’t worth putting in the effort of setting up a limited company if it’s only short term.
It’s always useful to have somebody take care of the admin, and an umbrella company will be responsible for admin tasks including tax returns and company records, as well as payroll.
Admin tasks can be tedious, to say the least, so you’ll be glad to know that the umbrella company will take care of tasks such as invoicing, chasing payments, sending timesheets, as well as everything in between.
With umbrella companies, employees get rights such as holiday pay, statuary sick pay, maternity and paternity, as well as a workplace pension, and it’s something that you won’t have to sort yourself which is always a bonus.