What is an umbrella company?
An umbrella company or PAYE umbrella is a company that acts as an employer to contractors whilst they work as independent contractors on fixed term contracts.
How does it work?
1) Form a contract
Once a contractor has secured a contract, the umbrella company creates and signs a contract with the associated recruitment agency. The contractor will also sign a contract of employment with the umbrella company that means that they will be employed by the umbrella company.
2) Submit working hours
After completing blocks of work, timesheets are sent from the contractor to the umbrella company and recruitment agency to determine wages.
3) Receive wage
The umbrella company will invoice the recruitment agency, which will bill the end client for the work completed by the contractor. This money is then paid through PAYE with the appropriately deducted tax and National Insurance.
What are the main benefits?
Compared to running a limited company, working under a PAYE umbrella company means that you can avoid some of the administrative work involved with incorporating a company and increasing your legal obligations. You’ll be able to simply concentrate on completing the project to a high standard. This is especially true if contracts are short term as there would be an additional time cost when setting up a limited company. As an employee, you could also benefit from some employment rights.
What is the main disadvantage?
Working under an umbrella company is usually the answer for those caught under IR35 legislation, which can have a significant impact on take-home pay. As you will be working under another company, you may lose some of your decision-making power.
IR35 is legislation used to determine if you should be classified as an employee for tax purposes. Unfortunately, there is no clear-cut answer to whether you would find yourself in or outside of IR35 as it would depend on the contract and arrangements with the client, so you would need to seek advice from an IR35 specialist.
If your contract is found to be within IR35, you will only be able to draw down a salary using PAYE so using a PAYE umbrella solution could be the most suitable choice. If you are not classified as inside IR35, then setting up a limited company may help to maximise your income. You can speak to one of our experts about the available options and we can help advise on the best route forward for you.
Once again, IR35 is dependent on the client and project so seek professional advice for each new contract to determine your position. You can assess whether the project is financially viable and whether the terms can be tweaked for a better outcome.
Is a PAYE umbrella right for you?
It is best to determine your IR35 status for each contract by seeking expert advice. Then you can discuss which option is the best for you financially with your accountant.
If you would like to discuss your options with Gorilla Accounting, get in touch through email@example.com or call 0330 024 0406.