Umbrella Companies – Everything You Need to Know

If you are new to contracting, you may be wondering, “what is an umbrella company”? If so, then we are here to help clear things up.

In the last ten years or so, umbrella companies have grown considerably across the UK. They provide contractors with a simple solution that enables them to benefit from a business structure without the hassle. There are hundreds of suppliers out there, so we take a closer look at how a PAYE scheme works. We will also cover how you can compare providers and provide you with the right questions that you should ask when deciding on the right scheme for you.

Umbrella Companies – What Are They?

A PAYE umbrella company is essentially a UK limited company that is handled by a third party supplier known to act as a supplier for those contractors employed by the company. The end client will sign a contract with the umbrella company on behalf of the contractor, who will carry out the agreed work or project.

All of the umbrella company employees will benefit from its payroll service and how it handles all of the administrative tasks. This will include processing timesheets and invoices while managing the payment of all salaries and deductions. 

As a contractor, you will still have the ability to claim for all legitimate business expenses that you experience as a contractor. However, what you can claim will depend on the contract you have and whether it is considered under the ‘Supervision, Direction and Control’ of the end client. If your contract is considered to be under these rules, you will not submit claims that relate to the costs associated with travel and subsistence.

However, if your contract does not fall under this, you can make claims, although you should read official rules to ensure you adhere to them. 

How does an umbrella company work?

If you join a UK-based PAYE umbrella company, then these are the steps that you will need to follow:

Step 1 – After you have agreed on the contract, the umbrella company you have chosen will sign a contract with the end client. 

Step2 – The umbrella company will also require you to sign a contract of employment with them.

Step 3 – After you have spent the agreed time on site, you will then complete a timesheet, and that will be passed to your manager for their signature.

Step 4 – You will be required to submit your timesheet to your end client or recruitment agency as well as your umbrella company. This will highlight how many hours you have worked per week or month.

Step 5 – Your umbrella company will then send an invoice to the end client, and that means that they will have to make the payment in a certain timeframe. 

Step 6 – The payment will be made to the umbrella company from the end client. At this point, they can then begin to prepare your payroll.

Step 7 – Your umbrella company will carry out the payroll process, and they will pay your salary while managing all taxes and deductions and their fee and pension contributions. For any allowable expenses that you have claimed, they will reimburse you for these too.

Step 8 – You will be provided with a payslip that will contain all of the information relating to your deductions and your take-home pay.

Step 9 – Once the end of the tax year arrives, you can go through the process of reclaiming all remaining expenses that you can offset against your income tax bill. 

How to Compare?

If you have your first contract in place, then there is every possibility that you have found this through a recruitment agency. Some recruitment agencies have forged partnerships with certain umbrella schemes, and they might try to encourage you to join one. However, the advice that we offer suggests that you don’t dive straight in and make sure that you consider the available options. At this point, you should ensure that you research before committing to a certain scheme. Of course, most of the information you need can be found online, but with that comes a need to filter through the content that is not relevant, so you are left with content that matters.

Some contractor comparison sites can provide some information on top umbrella companies. Still, it is always worth looking deeper as much of the information you are given can be tweaked slightly to look more favourable than others.

With all of this in mind, the best way of determining what umbrella companies are all about is to talk with currency clients. Of course, this can be a challenge, but if you know any other contractors, you could ask them what schemes they are using. This will provide you with honest information about what works for them and what doesn’t.

Is an Umbrella Company for You?

If you are looking for a hassle-free solution, then this could be the option for you. As they will take care of everything as an employer, it will mean that you can focus on ensuring you complete your projects professionally and on time.