With changes to off-payroll legislation (IR35) that have come into place in the public sector, and soon the private sector, demand for umbrella companies has drastically increased. Umbrella company payroll is an alternative payroll option to agency PAYE, and is a popular choice for contractors who can no longer work through a PSC (Personal Service Company). Are you aware of the benefits?
They are the easiest way to get paid as a contractor
An umbrella company will act as your employer while you are working through a recruitment agency (or providing services directly to an end client). The umbrella will process your payroll for you and make PAYE (Pay As You Earn) tax and National Insurance deductions on your behalf before paying your net salary to your bank account. Due to the ease of working through an umbrella, many individuals who are new to contracting find that using one is an excellent place to start.
Umbrella companies are also the most popular choice for contractors who are caught by IR35 or are otherwise unable to be directors of a limited company.
Continue reading to find out how an umbrella company works, the difference between PSCs and working through an umbrella, and the benefits you will see.
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How do umbrella companies work?
Using an umbrella company to get paid is quite different from working through a PSC — all of your income is taxed at source, similar to a permanent employee’s salary. When you use an umbrella company, you are on the company’s payroll as an employee. As your employer, the umbrella will make all tax and NI deductions on your behalf for a weekly or monthly margin. This margin should be the only thing a compliant umbrella company keeps – the rest of the deductions go to HMRC.
It is important to remember that the daily or hourly rate your agency gives you is your contract rate, not your salary. If you were to choose the agency PAYE route, you would typically receive a slightly lower agency rate. An agency rate will take into account the fact that the agency must pay employment costs and run your payroll — a key reason why an agency may not offer for you to go on their books. The umbrella company is there to process your payroll, making it more convenient for both you and your agency.
Employers NI and Apprenticeship Levy (‘Employment Costs’)
The umbrella company, as your employer, has a legal obligation to pay employer’s NI and the Apprenticeship Levy to HMRC. These contributions must come from the contract rate you are given by your agency, who has a business to business contract with the umbrella company. These employment costs, along with the umbrella company’s margin, will be deducted from your contract rate before arriving at your gross salary. The umbrella company will then deduct the employee’s NI and income tax (PAYE) from your salary on your behalf, and send it to HMRC. After the umbrella company makes these tax and NI deductions, you will arrive at your net salary (take home pay). This is how all compliant umbrella companies operate.
How will my take home pay be different through an umbrella company?
PSC contractors working outside IR35 can legally take home around 70% – 80% of their company’s earnings due to the tax planning options available. By comparison, umbrella company workers can expect to take home anywhere from 55% – 70% of their income depending on their contract rates. You must be aware that all compliant umbrella companies should be giving you around the same net take home pay. The only real difference between umbrella companies should be the margin they charge for processing your payroll.
Umbrella companies are suitable for all contractors
Using an umbrella company is the easiest way to get paid for any contractor. However some circumstances are even more suited to an umbrella company, such as:
- Inside IR35 contract roles
- New to contracting
- Rates at less than £15 per hour or £100 per day
- Assignments of three months or less
- Most public sector contracts (and from 6th April 2020, many private sector contracts)
- Circumstances where a contractor cannot be or does not want to be a limited company director
The administration is minimal
Working through an umbrella company requires minimal administration and paperwork from you. Once you have completed the registration process, signed your contract with the umbrella and provided your ID and P45, getting paid is easy. All you are required to do is submit your timesheets according to your payment frequency. For example, if your agency pays you weekly, you will provide your signed timesheets to the umbrella company weekly. The umbrella company will raise an invoice requesting payment for your hours worked from the agency, who will send payment to the umbrella company.
Overall, your weekly administration through an umbrella company should only be 10-15 minutes.
You are entitled to Employee Benefits
When you work through an umbrella company, you become their employee, and as such you will be entitled to statutory employee benefits like a permanent employee. These include:
- Sick Pay
- Maternity Pay
- Paternity Pay
You do not have to be concerned about IR35
Because you are an employee when working through an umbrella company, IR35 is not relevant to you. IR35 rules – now commonly referred to as off-payroll rules – only concern contractors who are working through a Personal Service Company (limited company). Employees of an umbrella company are taxed at source and as such IR35 is not an issue.
However, you should know how to spot and stay clear of tax avoidance schemes. These may be ‘umbrella companies’ who claim to offer you over 90% take home pay. Many of these firms may be operating loan schemes, which can land contractors in trouble with loan charge legislation.
You are insured throughout your assignments
Compliant umbrella companies will provide you with three types of insurance, which will cover you across all assignments that you work with the umbrella company as your employer:
- Employers’ Liability Insurance
- Public Liability Insurance
- Professional Indemnity Insurance
Churchill Knight Umbrella will provide you with insurance coverage of up to £25 million. This is included in our umbrella payroll service for no extra cost.
It’s easy to leave when your circumstances change
When you no longer need to use an umbrella company, it should be easy to leave their services. Provided that the company doesn’t have a tie-in period or leaving fee (like Churchill Knight Umbrella), you should be able to request your P45 and leave the service quickly. This makes it easier to transition into permanent employment, retirement or working through a limited company.
Signing up with an umbrella company is straightforward
You will usually be required to complete a registration form that will ask you for personal details and information regarding your assignment. The umbrella company will also require proof of your identity and right to work to legally pay you.
You can register with Churchill Knight Umbrella quickly and securely online or over the phone. Our team will be happy to explain and go through the process with you.
When an umbrella company receives your registration form and is happy with the details, you will need to sign a contract of employment with the umbrella company and provide a copy of your P45. The P45 will ensure the umbrella company can place you on the correct tax code.
Customer service is paramount
The umbrella payroll market is competitive, and many providers claim they are the best – you can use this to your advantage. When you are choosing an umbrella company, make sure you are assigned a dedicated consultant or account manager. They will act as your direct point of contact, answering your questions in promptly and efficiently.
One quick phone call with an umbrella company will give you a feel of the level of care they will provide to you – so try to speak to someone over the phone when you are researching umbrella companies.
If you would like to have a free consultation with someone at Churchill Knight Umbrella, call us on 0808 2564647.
Churchill Knight Umbrella
If you would like to join Churchill Knight Umbrella or speak to one of our experts about your circumstances, call us on 0808 2564647 or contact us here. We will be happy to provide you with a personalised take home pay illustration, and a full explanation of our service and the benefits included.
Churchill Knight Umbrella operates in full compliance with HMRC legislation and offers all of the benefits listed above.