An Umbrella Company is the one that becomes an employer to those who work as freelancers or on temporary contracts. It doesn’t help them find contracts or work but only acts as their employer. Umbrella Companies became more popular in the United Kingdom when the British government introduced IR35 legislation.
Before IR35, some company employees left their permanent position and started working as contractors or set up their own limited companies but followed the same duties or roles as a permanent employee to reduce their tax bill. When HMRC (Her Majesty’s Revenue and Customs) found out about this, they passed the IR35 legislation, which allowed them to identify such disguised employees and demand them to pay the same taxes as a permanent employee.
At first, it was only implemented in the public sector in April 2017, but now, it has also applied to the private sector since April 2021.
WHAT IS AN UMBRELLA COMPANY?
Being an Umbrella company employee, you are paid only after-tax deduction as per the PAYE tax(Pay As You Earn) system, and hence you are not a disguised employee anymore. Also, you can work under more than one contract as working only on one contract as a part of an Umbrella Company portrays you as a permanent employee in the eyes of HMRC, which is not the case.
When you join an Umbrella company and get a contract, the umbrella company signs the contract with your recruitment agency/end-client on your behalf as it is your employer now.
After your work is completed, i.e., you submit the timesheet to your client, the Umbrella Company invoices the bill to the recruitment agency. The money is then paid to the Umbrella Company.
Now, the Umbrella company deducts tax such as PAYE before handing you the money and the taxes are paid to HMRC on your behalf.
TAXES AND EXPENSES
Umbrella companies use the same calculation for a tax deduction as any other employer or company. Still, the difference arises due to the margin retention by the Umbrella Company and their various schemes.
The Umbrella company cannot deduct National Insurance Contributions from your gross pay. If you find any incorrect deductions, you must contact your employer.
You are responsible for covering National Insurance Contributions (as the Umbrella Company doesn’t benefit from your work) and Apprenticeship Levy and not the Umbrella Company, unlike other companies with permanent employees.
As a part of any company, you are entitled to claim allowable expenses such as professional subscriptions, accommodation and travel expenses. But when you work under an Umbrella Company, you can take up different contracts at different workplaces and still claim all the costs.
You are entitled to benefits just like a permanent employee. Generally, you are given two kinds: statutory payments and Lifestyle Benefits.
- Statutory Payments include Holiday Pay (according to the hours you work), Statutory Sick Pay (SSP) and Statutory Maternity or Paternity Pay.
- Lifestyle Benefits include Legal Support, Critical Incident Care, Clinical Counselling and Dependent Care
You will also be entitled to other State Benefits such as State Retirement Pension as a part of the National Insurance Contributions made by you.
PROS AND CONS
The advantages of working through an Umbrella Company include:
- A hassle-free and easy process as you can become a part of an Umbrella Company within a few minutes.
- If you are exploring the world of contracting, it is the right place for you.
- Although you work for different clients, your employer remains the same,i.e., if you stay in the same Umbrella Company, it gives you a status of continuous employment, which helps apply for loans or mortgages.
- Peace of mind as all tax affairs are taken care of by the Umbrella Company.
- It is a low-risk solution if you are caught by IR35.
The disadvantages of working as a part of an Umbrella Company are as follows:
- Minimal control of your work and finances as compared to in your own company
- Less tax efficient as compared to your own limited company
- Many Umbrella companies have emerged, and a need to be alert before signing a contract.
UNDERSTANDING YOUR PAY
It is your right to receive a payslip from the Umbrella Company. The payslip must have the following details as per the new payslip rule with effect from 6th April 2019: earnings before deductions, earnings after deductions, fixed deductions and variable deductions such as NI or tax.
- Payments: It must show your basic pay, holiday pay, overtime pay or any sickness/maternity payment. You can choose whether you want holiday pay to be paid weekly or in a lump sum as per your wish.
- Deductions: It includes all the deductions such as PAYE, NI or pension contributions (if any).
- This Period: It shows your pay before and after deductions.
- Year To Date: It shows your Gross Pay and Tax Deductions till date.
- Net Pay: It refers to the final payment made to you after all deductions.
- Reconciliation Statement: It shows the breakdown of the calculation of your final payment. It lists down the Umbrella Company’s margin, your National Insurance Contributions, Apprenticeship Levy and any pension contributions made.
- Key Information Document: It is responsible for knowing your PAYE and Umbrella rate.
HOW TO AVOID FRAUDULENT UMBRELLA COMPANIES
Due to the changes in Off-payroll since April 2021, many self-employers and contractors resorted to Umbrella Companies for their rescue.
But due to a spike in demand, there has been an increase in frauds duping these contractors. To avoid this, contractors must be cautious while searching for an Umbrella Company online.
HMRC always tends to go after clients and companies with tax avoidance schemes. So, Never join an Umbrella Company that promise you that you can avoid paying taxes.
To choose a legitimate Umbrella Company, visit a list of UK-based PAYE Umbrella Companies accredited by Financial Sector Conduct Authority (FSCA) or Professional Passport. These two firms are responsible for regulating and conducting audits to ensure the Umbrella Company is legitimate and follows UK tax laws.