Since the beginning of the decade in the middle of 2000, umbrella corporations have expanded. Using an umbrella company eliminates the need for independent contractors to form their own limited liability companies and provides a hassle-free corporate structure. Due to this, more than 200,000 people in the United Kingdom work through umbrella companies, and the number continues to rise as more people enter the self-employed industry. Also, after the implementation of IR35 regulations, umbrella companies have become more prevalent in the UK.
How Does This Function?
In the United Kingdom, umbrella corporations serve as the employer of agency contractors who are typically placed on contract assignments by a recruitment agency.
Here is a detailed explanation of how this process works.
- You register with the umbrella organization (you can do this online or over the phone)
- You sign an employment contract with the umbrella company
- You send timesheets detailing the number of hours worked alongside expense claim forms to the umbrella organization.
- The umbrella company bills the recruitment agency, which then bills the final client.
- Upon receipt of payment from the agency, the umbrella company prepares your payroll.
- Umbrella Following deductions for taxes (income tax + National Insurance), the pre-agreed umbrella charge, and other deductions, the company processes your payroll and gives you a wage (for pension contributions, for example).
Are There Substantial Tax Benefits To Employing An Umbrella Company
You will get an overarching contract of employment and become an employee of the Umbrella company, performing a variety of roles at various locations based on your abilities; these workplaces will be considered temporary workplaces. This can allow you to deduct subsistence and travel expenditures from your gross wage, so minimizing your tax liability. This concept is appropriate for contractors who work in multiple locations.
Contractual Arrangements And Minimum Wage (NMW)
The National Minimum Wage (NMW) applies to contractors who are employed by a conforming umbrella service provider and have a contract of employment.
Some umbrella companies pay their employees less than the minimum wage and make up the gap with expenditures such as food and travel. HMRC has claimed that they are aware of “schemes” through which umbrella companies evade paying the National Minimum Wage and that they will take appropriate action.
Considerations When Selecting An Umbrella Company
How can you guarantee that you are selecting the best company? Despite the fact that the majority of umbrella businesses provide compliance and high-quality services, a tiny number of organizations have tarnished the sector’s reputation.
If you are just starting out as a contractor and looking for an umbrella company, you will be inundated with hundreds of companies making various claims and promises; if a claim sounds too good to be true, it most often is.
Here are our seven recommendations for independent contractors selecting an umbrella organization.
- Experience – seek out a well-established business with specialized knowledge and compliant service.
- Higher take-home pay – if a company promises higher net pay that sounds unreasonable, it is preferable to avoid them.
- Fee structure – Prior to selecting an umbrella business, it is crucial to confirm that there will be no joining and exit costs.
- Claim expenses without receipts – avoid companies that let claiming expenses with “No Receipts.” Even for acceptable expenses, it is recommended that receipts be kept.
- Employee perks – Ensure that the company you select offers employee benefits such as vacation, sick, maternity, and paternity leave.