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How Umbrella Companies work
13 July, 2010
An Umbrella Company is an alternative to setting up a Limited Company, and normally the most cost effective way for contractors to operate. It provides a complete professional employment service that should include a contract of employment, PAYE and National Insurance, HR support, timesheet control, invoicing and collection of payments from clients or agencies.
Employees of Umbrella Companies are given a tax relief on work expenses including travel and overnight expenses, and this usually increases monthly payments. With the introduction of the IR35 along with the special dispensations that Umbrella Companies receive this choice icertainly proves to be the most cost effective option for contractors.
Points to note:
- The amount received by the Umbrella Company is determined by the timesheet signed, this being a record of your hours worked,
- It will raise invoices and make payments on your behalf,
- When payment is made you will receive a pay-slip detailing PAYE, NIC, expenses, and the Umbrella Company’s fees.
- Independent contractors working inside of IR35 are liable for both employee’s and employer’s national insurance and these will be shown separately on your pay-slip.
- The only variation in earnings between Umbrella Companies will be the fees they charge, as all other deductions are determined by the Inland Revenue.
- Any expenses claimed will be processed by the Umbrella Company and refunded; anything that you claim must be allowable by the Inland Revenue and must be a cost to you personally that is entirely attributable to and has been wholly caused by the contract.
- Should you be investigated by the Inland Revenue you would need to produce receipts for all your expenses regardless of the dispensation that Umbrella Companies have. The only expense that can be claimed without a receipt is the daily subsistence allowance of £5 in the UK and this is only claimable when working away from home overnight.