What is an Umbrella Company?

13 May 2009

An Umbrella Company is an organisation that contractors can join to ease their tax and pay issues.

Since the introduction of IR35 most companies or recruitment agencies that employ the services of contractors have required that they are invoiced for the work performed from a limited company.

An Umbrella Company is an organisation that contractors can join to ease their tax and pay issues.

Since the introduction of IR35 most companies or recruitment agencies that employ the services of contractors have required that they are invoiced for the work performed from a limited company.

This is because of concerns that if they pay the contractor direct then they can become liable for tax they should have deducted at source if it is ruled by HMRC that the contractor should have been treated as their employee.

Companies using the services of contractors are also concerned about the contractor gaining employment rights and/or that they have appropriate insurances in place.

By joining an Umbrella Company a contractor automatically meets these requirements and their status is clarified as being an employee of the Umbrella Company.

The Umbrella Company is then responsible for statutory obligations such as minimum wage, holiday entitlements, maternity/paternity leave, insurances, taxes (PAYE/National Insurance).

They take over the contract with the recruitment agency or end client and are then responsible for collecting your timesheet, invoicing for work performed, cash collection and paying you after deducting all relevant taxes.

An alternative to joining an umbrella company is to set-up your own limited company but often the legal, accounting and administration costs can outweigh the benefit.

The cost of joining an Umbrella Company can be as low as £11.52 per week after tax (note the gross cost is higher but the effect on your take home pay of the fee is often the cost quoted).

A big benefit of joining an Umbrella Company is that you can be reimbursed partly by payment of expenses you have incurred i.e. these do not form part of your pay and are therefore tax free. Normal expenditure allowed to be reimbursed in this way are travelling costs to the end client (including travelling in your own car), subsistence (food and drink) while working away from home and any accommodation costs if working away. You also do not need to take out your own expensive insurance cover.

If you are a contractor looking for further advice on What is an Umbrella Company please call PayMatters today on 0800 121 6513 for a free consultation.