Umbrella companies have grown in popularity in the UK over the last decade, and they can provide a somewhat hassle free business structure for many contractors. With hundreds of providers to choose from, we examine how a PAYE scheme works in practice, how to compare providers, and what questions to ask when deciding on a scheme.
What is the definition of an umbrella company?
An umbrella company (PAYE), is a UK limited company that is run by a third party on behalf of its contractors, as an “employer”.
A contract is signed between the umbrella company and the recruitment agency (or end client) for the work that is going to be carried out.
An umbrella company provides payroll services to its “employees”, handling all timesheets and invoices, and completes pay packs for salary after deductions.
In practice, how does an umbrella company operate?
If you join a PAYE umbrella company in Northern Ireland, here are the steps you’ll take:
- The umbrella firm (as your “employer”) signs a contract with your recruitment agency once you’ve acquired a new contract.
- You will also sign an employment contract with the umbrella.
- When you’ve finished working on site for a pre-determined amount of time, you fill out a timesheet and give it to your manager to sign.
- Submit a timesheet to both your recruitment agency and your umbrella, detailing the number of hours you worked that week/month.
- The umbrella business will send an invoice to the recruitment agency, which will then send an invoice to the end client.
- Once the umbrella firm has received money from the agency, they can start working on your salary.
- After deducting employment taxes, the pre-agreed umbrella fee/margin, personal taxes, and pension contributions, your umbrella will process your payroll and send you a salary (if applicable). They’ll also pay for any agreed-upon (chargeable) company expenses you’ve incurred (see below).
- You’ll be given a payslip that shows all of these deductions as well as your net take-home pay.
What about the costs?
Just like any other traditional (permanent) employee, you will be reimbursed for reasonable business expenses that you have pre-agreed with your client or recruitment agency. These are what are referred to as ‘chargeable’ expenses.
You may also be able to deduct any additional business expenses you incur as a contractor, but only if your working condition is not judged to be under your client’s “Supervision, Direction, and Control” (SDC).
If the SDC restrictions apply to your contract work, you will not be able to recoup your travel and subsistence expenses.
The formal backdrop to these restrictions, which went into effect in April 2016, may be found here.
If the SDC rules do not apply to you, you should claim any non-chargeable costs through the self-assessment process at the end of the tax year.
Where can I look for reviews/compare schemes?
If this is your first contract, it’s likely that you found it through a recruitment agency.
Many agencies have preferred supplier connections with some of the most well-known umbrella plans, and they will advise you to join one of them.
Before joining up with a certain company, we urge that you think about your options and explore the remainder of the market. If a recruiter receives a ‘kickback’ for promoting a specific umbrella, it’s possible that it’s not the greatest option for you.
The most important source of contracting-related information is undoubtedly the internet, but separating marketing jargon from actually valuable content is a difficult effort in and of itself.
Above all, existing clients are the best source of information regarding umbrella firms. If you’re just starting out, this may be challenging, but if you have any contracting colleagues, ask for their input. You’ll quickly learn which umbrellas are popular among your friends and which ones you should avoid.
What does it cost to hire an umbrella company?
Umbrellas are usually charged on a weekly or monthly basis. This can range from as little as £12 per week to as much as £25 per week or more. Read our in-depth guide to umbrella fees and prices for more information.
What is my net take-home pay going to be?
Importantly, providing you’re using a valid UK-based PAYE umbrella, your take-home pay should remain consistent regardless of which payroll company you use. The margin (surcharge) charged by the umbrella should be the sole variable.
Before you sign up, request a take-home pay estimate from each of your potential umbrella businesses. This should be an easy-to-understand overview of your earnings and expenses
As a new client, you should be given a Key Information Document that shows both your PAYE rate (on which personal taxes are due) and the umbrella rate (which is how much the agency will charge you for your time and includes employment charges like Employers’ NI and the Apprenticeship Levy).
Any questions that you have about our company and the services that we provide, as well as any guidance you might need, please get in touch and we are happy to answer and assist with any questions that you might have.
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