- What is an umbrella company?
- An umbrella company is a PAYE payroll service for contractors and freelancers. The contractor/freelancer will become an employee of the umbrella company and will be paid by them, minus deductions including tax and National Insurance Contributions (NIC). Using an umbrella company is widely accepted as being the easiest way to get paid as a contractor or freelancer.
- How does an umbrella company work?
An umbrella company will officially become your employer once you have completed their registration process, usually consisting of a detailed application form and identity check. Once registration is complete, you will become an employee of the umbrella company and receive your salary from them by PAYE. The appropriate deductions, including tax and National Insurance Contributions (NIC) will be made on your behalf. As an employee, you will be eligible for employee benefits including Sick Pay and Annual Leave.
Your umbrella company will sign a contract with your recruitment agency. Your client will pay your recruitment agency their agreed rate, the recruitment agency will then pay the umbrella company, and finally, the umbrella company will pay you your wages (minus deductions).
- Am I self-employed when using an umbrella company?
- No. Whilst you are contracting through an umbrella company, you will become their employee and will have access to employee benefits including Sick Pay.
- How will I be paid when working through an umbrella company?
- A majority of umbrella companies will pay you by electronic bank transfer (BACS).
- How often will I be paid by an umbrella company?
- As a contractor working through an umbrella company, you will be paid in accordance to the schedule you have agreed with your recruitment agency.
- Who should use an umbrella company?
- Umbrella companies are designed to accommodate contract workers who do not want to set up their own limited company or be responsible for the associated administration of being self-employed. The umbrella company will become your employer and pay you via PAYE.
- When should I use an umbrella company?
- Any contractor or freelancer can use an umbrella company as their payroll provider. However, umbrella companies are typically a perfect service for:
- First time contractors
- Contractors earning £15 per hour or below
- Contractors working in the public sector
- Contractors working on short term assignments
- Contractors who do not want a limited company
- How much does it cost to join an umbrella company?
- There is usually no joining fee when signing up to an umbrella company. Have a look for an umbrella company that is fully compliant with HMRC legislation and that does not charge a joining fee.
- How do umbrella companies make a profit?
- Umbrella companies will deduct their clients a weekly or monthly margin. The margin will either be fixed, or a percentage of the clients income.
- How much does it cost to use an umbrella company?
- The cost of using an umbrella company will vary between providers but you should typically expect to pay between £25 - £35 per week and £110 - £140 per month.
- What will an umbrella company deduct from my pay?
- You will be paid as a Pay As You Earn (PAYE) employee and will have tax and National Insurance Contributions (NICs) deducted from your salary (and paid to HMRC), as well as the umbrella company’s margin.
- What does Pay As You Earn (PAYE) mean?
- Pay As You Earn (PAYE) is a process used by employers when paying their employees’ wages. The employer will make the correct deductions to the employees’ pay, including tax and National Insurance Contributions (NICs), then pay the employee, usually by a BACS bank transfer.
- What is a BACS bank transfer?
- A system of sending payments from one bank account to another. Typically, a BACS transfer will be set up as a direct debit and each payment will take an estimated 3 days to clear.
- How much money will I take home using an umbrella company?
Every compliant UK based umbrella company will make the same deductions to your pay, except for their margin which will vary.
To get a tailored umbrella take home pay calculation, contact a compliant umbrella provider and ask for a personalised projection.
- What is a contractor calculator?
- A contractor calculator is a tool designed to provide contractors with an accurate take home pay figure representing what they will earn when using a specific payroll service (e.g. a limited company or an umbrella company). The take home pay figure will exclude the appropriate tax, National Insurance Contributions (NICs) and service related costs. Contractor calculator is a tool designed to provide contractors with an accurate take home pay figure representing what they will earn when using a specific payroll service (e.g. a limited company or an umbrella company). The take home pay figure will exclude the appropriate tax, National Insurance Contributions (NICs) and service related costs.
- What is the most tax efficient way to operate as a self-employed worker?
- Setting up and working through your own limited company (often referred to as a personal service company) is the most tax efficient way to operate as a self-employed worker. This will legally maximise your take home pay and reduce your tax burden compared to an umbrella company.
- Are umbrella companies compliant with HMRC legislation?
Not every umbrella company is compliant with HMRC legislation. For example, umbrella companies that promise you an alarmingly high percentage of take home pay are more than likely encouraging you to avoid tax.
Before you commit to using an umbrella company, make sure they operate in full compliance with HMRC legislation and are regularly audited to ensure their processes are correct and up to date.
- What information will I need to provide when I join an umbrella company?
- When you join an umbrella company, you will need you to complete a registration form. This is usually a one off process that will require you to provide them with the following information:
- Full name
- Date of Birth
- Phone Number
- Email Address
- Passport/ID Number and country of issue
- National Insurance Number
- National Insurance Code
- Tax Code
- Student Loan
- Bank/Building Society Name
- Account Number and Sort Code
- Recruitment Agency Name
- Assignment Start Date
- What administration will I need to carry out?
- When you use an umbrella company, your administrative responsibilities are kept to a minimum. Once the registration process is complete and you have signed a contract with the umbrella company, you will be required to upload timesheets and your expenses (receipts), if applicable.
- How do I submit my timesheets?
- Most umbrella companies will have their own online portal that you can use to upload your signed timesheets. For umbrella companies that do not have their own online portal, you will be required to email them a signed copy of your timesheets, or send it to them via post. If you are required to send them by post, make sure you keep a copy.
- Will I receive payments such as sick pay and holiday pay?
- When you work through an umbrella company you are entitled to the same benefits as those who are in full-time employment. You are entitled to Holiday Pay, Sick Pay, Maternity Pay and Paternity Pay.
- How is holiday pay calculated?
- As an employee of an umbrella company, you are entitled to Statutory Annual Leave, which is equal to 5.6 weeks per year. This is equivalent of 12.07 percent of the hours you have worked.
- What insurances are available?
- Most umbrella companies will ensure their employees are protected with Employers' Liability Insurance, Public Liability Insurance and Professional Indemnity Insurance. These should be included in your contract with the umbrella company and not cost you anything extra.
- What is Employers’ Liability Insurance?
- Employers’ Liability Insurance will protect your umbrella company against compensation claims made by their contractors in regards to illness or injury obtained in their place of work. It is a legal requirement.
- What is Public Liability Insurance?
- Public Liability Insurance will protect us against claims from the public if you have caused a personal injury or damage to property when working.
- What is Professional Indemnity Insurance?
- Professional Indemnity Insurance will protect us if somebody claims you have not provided the appropriate level of service as agreed. This can include what is perceived as poor quality work and inaccurate advice.
- Can I claim expenses using an umbrella company?
Unfortunately, from 6 April 2016, HMRC confirmed that contractors working through umbrella companies were no longer able to claim tax relief on travel and subsistence expenses if they were subject to supervision, direction or control. In the eyes of HMRC, this was done to level the playing field and make things fair between full time employees and contractors (because full time employees are unable to claim travel and subsistence expenses).
You can still claim travel and subsistence expenses through an umbrella company if:
- You are not subject to supervision, direction or control when carrying out your assignment.
- You are a mobile worker (by definition in accordance to HMRC).
- What are travel expenses?
For the minority of contractors that are legally able to claim travel expenses, these include:
- Travel required in order to carry out the agreed requirements of an assignment
- Travel to a place of work or travel from a place of work (excluding commuting)
- Travel between the workers home and a temporary place of work (from home to the temporary site and from a temporary site back home)
If you are claiming travel expenses, it is likely you will have an agreed amount with your client. HMRC has set benchmarks for travelling in your own vehicle. If you are claiming for travel on public transport, check with your employer if there is a limit to your claims.
- What are subsistence expenses?
Subsistence expenses include the expenses that arise when on a business trip. These include:
If you are claiming subsistence expenses, it is likely you will have an agreed limit with your client. HMRC has set benchmark rates, designed for employers.
- Am I subject to supervision, direction or control?
- HMRC believe a majority of contractors are under supervision, direction or control (SDC) in their place of work. Established umbrella providers will have an easy to answer SDC questionnaire (created with assistance from an industry body such as Professional Passport), designed for contractors to determine their SDC status. Make sure you ask your umbrella company for assistance when determining your SDC status.
- What is supervision, direction or control (SDC)?
HMRC has decided that if a contractor is subject to supervision, direction or control, they are not eligible to claim tax relief on travel and subsistence expenses.
Supervision – when you are being overlooked at your place of work to make sure you are carrying out your tasks in accordance to your contract. If you are receiving assistance, advice or help from anyone in your place of work, this can also count as supervision.
Direction – when you are being given clear instructions, guidance or assistance on how to carry out your tasks.
Control – when you are directly being dictated to in the workplace and you must do as asked in order to correctly carry out your assignment. If you are asked to move from location to location (whether inside an office or externally), you are under control.
To find out more, please visit the HMRC website for their official definitions.
- Am I a mobile worker?
- Regardless of your supervision, direction or control status, if you are required to travel to irregular temporary locations during your assignment, you are a mobile worker. You can claim travel expenses for your journeys between the worksites, whether driving your own vehicle or using public transport.
- Do I need to keep the receipts for expenses that I am eligible to claim for?
- You must keep all receipts that you are claiming expenses for.
- How do I submit my expense claims when using an umbrella company?
- Most umbrella companies will have their own online portal that you can use to upload your receipts for eligible expenses. For umbrella companies that do not have their own online portal, you will be required to email them a copy of your receipts, or send them by post. If you are required to send them by post, make sure you keep a copy.
- How do I leave an umbrella company and does it cost anything?
- Some umbrella companies may charge you a fee if you are looking to leave their service. Have a look for an umbrella company that is fully compliant with HMRC legislation and that does not charge a leaving fee.
- How do I start a limited company instead of using an umbrella company?
- If you have decided you want to start your own limited company, it is a good idea to get in contact with an accountancy provider that specialises in contractor services. For a monthly fee, a contractor accountancy provider will be able to help you with all the administration involved in setting up and running your own limited company.
- Is it easy to change umbrella companies?
Switching umbrella companies is an easy process, provided both parties involved are compliant with HMRC legislation and are run ethically. You should alert your current provider about your desire to leave their services and let them know the details of the new umbrella company you will be using. Once you have expressed you want to join the new umbrella, they will make contact with the old provider and the two parties will take care of a majority of the administration involved in the switchover.
You will be required to sign up with the new provider and complete a registration form, as well as providing them with proof of your identity and address.
- I am not sure if an umbrella company is the right option for me?
Using an umbrella company is the easiest way to get paid as a contractor and the administrative burden is kept to a minimum. However, an umbrella company is not the most tax efficient way to work as self-employed, and setting up a limited company will increase your take home pay.
Make sure you carry out some thorough research when deciding whether or not to use an umbrella company. It is also a good idea to read some contractor forums and speak with your recruitment agency who will be able to provide you with support.
- Can I use an umbrella company even though I have a limited company?
- You can use an umbrella company and have a limited company at the same time. Whilst you are using an umbrella company, your limited company will become dormant and no payments can be put through it for the same assignment.
- Should I use an offshore intermediary instead of a UK based umbrella company?
You should never consider using an offshore intermediary when working in the United Kingdom. HMRC is hunting for contractors who are using offshore intermediaries to reduce their tax burden. Promoters of offshore intermediaries are also being chased.
If you are caught by HMRC, you will be required to pay back the tax you are perceived to owe, as well as a potentially huge fine.
- I recently saw a company on Google offering 90 percent take home pay, are they legitimate?
- If you see a company offering you the chance to take home 90 percent of your pay, alarm bells should already be ringing. As explained in the question above, HMRC is continuously looking to catch contractors that are using offshore intermediaries to lower their tax burden. You could be required to pay back all of the tax you owe, as well as pay significant fines.
- How much does it cost to use an umbrella company?
- Every compliant UK based umbrella company will make the same deductions to your pay, except for their margin which will vary.
- Do I need to submit a personal tax return when using an umbrella company?
- Usually, contractors using an umbrella company do not need to submit a personal tax return to HMRC because they receive PAYE and the tax and National Insurance Contributions (NICs) have already been made and recorded by your umbrella provider. However, you will be required to submit a tax return if you have an income of over £100,000, you have additional income (for example, from a rental property or investment) and if HMRC has personally requested you to do so.