What Exactly Are PAYE Umbrella Companies?
The best way to understand an PAYE umbrella company is to see it as an intermediary company that sits in between you, the contractor and your clients. The main reason for doing this is so that it can handle all of the annoying admin that comes with contracting, such as dealing with invoices, managing payroll and sorting out taxes. By taking over this kind of stuff an umbrella company frees you up to do more of what you actually enjoy doing and stops you having to worry about the stuff you hate doing.
In addition, it takes away any worries about tax by taking over the handling of payment for your work. Your clients will pay the umbrella company for the work you do and your umbrella will then process the payment before passing it back to you.
What do UK Umbrella companies do?
- 1. handle the invoicing of the client
- 2. handle the invoicing of the client
- 3. sort your taxes out
- 4. Pay you
So I Would Be Working for the Umbrella Company?
In a way, yes. You still get all the freedoms that come with contracting for yourself, managing your working life and picking and choosing your clients with no boss to answer to, but at the same time you also technically become an ‘employee’ of your umbrella company. Once you are an employee you will then earn money via PAYE and pay National Insurance contributions, all of which will be handled by the umbrella. And consequently you will never have to deal with HMRC again, nor have to worry about any invoices or chasing clients for money.
Does That Mean I Can No Longer Claim Expenses?
Not at all, no. As with working as a limited company contractor, it is also possible to maximise your income through expenses when working for an umbrella company. To give one example, as you will be working under an employee / employer structure and will be working at numerous different locations, each of these locations will be classed as a ‘temporary workplace’ and this means that you are allowed to offset your travel and subsistence expenses for getting to the site and home again as well as any expenses incurred whilst at the site.
Is IR35 An Issue?
Here’s the good bit – IR35, the legislation that causes most contractors to wake up at night in a cold sweat, becomes completely irrelevant once you sign up to an umbrella company. If you’re working for a PAYE umbrella then you are paying the right amount of PAYE and NIC’s and are therefore not affected by IR35.
Ok, Sounds Good. How Does It Actually Work Then?
It’s incredibly simple. Sign up with an UK based umbrella company and they will get you to sign an employment contract. Then you just carry on working contracts as normal, the only difference being that you and your client will sign a timesheet which is then passed back to your umbrella . They then invoice the client and once the client pays, they deduct your tax and NIC’s and then pay you. And that’s it!