Contractor umbrella companies have been around since around 2005. Up until that point, most contractors and freelancers either worked through their own limited company or as a PAYE employee of a recruitment agency or the end client.
As more and more individuals enter the freelance market there are now over 200,000+ people in the UK who are paid through an umbrella company, with this figure set to increase.
How does an umbrella company work?
A simplified explanation is:
1. You chose to join an umbrella company of your choice.
2. You then sign an employment contract between you (the employee) and the umbrella company (the employer)
3. At the end of the week, you submit your hours & expenses to the umbrella using their on-line portal
4. The umbrella company invoices your recruiter or client (if working direct)
5. The umbrella company pays you through PAYE, after the deduction of allowable business expenses
6. At the end of the tax year, your umbrella company gives you a P60 and P11D (for any expenses claimed)
What are the tax advantages of using an umbrella company?
Unlike traditional employees, umbrella workers will undertake a series of separate assignments with their umbrella company, and on the whole each assignment will be performed at a separate location (usually the office of the end client). Provided the umbrella has a sufficiently robust ‘overarching employment contract’ with it’s employees, these workplaces will be classed as ‘temporary’ for tax purposes. This means that umbrella workers are able to offset the cost of their travel & subsistence expenses getting to work, and whilst on site.
Claiming expenses pre-tax reduces an umbrella worker’s taxable gross salary and subsequently the amount of tax paid. On the whole, there is usually a 5 -10% difference in take home pay between umbrella company and straight PAYE.
It is important to note here that new legislation came into effect from April 2016. From this date, the types of expenses that can be claimed and reimbursed through an umbrella company are dependent on the type of assignment you’re working on and whether it’s subject to supervision, direction or control (SDC).
You will need to refer to your agency and umbrella company for more information on how SDC effects you, your working arrangements, and your ability to claim expenses.
There are lots of other benefits to working alongside Pendulum Contracting Services, but if you’re still unsure and need to discuss the matter further than our team is on hand just waiting for your call.
Call 0333 0066 296 to find out more!