What is an umbrella company?
The primary function of an umbrella company is to organise payments for fixed-term work undertaken by independent contractors. They employ temporary workers or contractors on behalf of the employment agency, who will then provide the worker’s services to the client.
Umbrella companies’ popularity lies in their simple design, which allows the contractor to concentrate on their work while all responsibilities regarding their income are being taken care of.
In short, umbrella companies allow freelancers to engage in multiple short term contracts without having to worry about operating a limited company of their own whilst remaining fully compliant with IR35 legislation.
When do you use one?
If you are just starting your contracting career, working with an umbrella company is an easy and stress-free way of introducing yourself to the freelancing lifestyle. If you are picking up a short term contract or your contract rate is relatively low (say below £250/day), an umbrella company could be the right trading vehicle. They will take care of your admin (for example, when switching contracts), taxes and provide full statutory and additional employment benefits, such as insurance.
How will you get paid?
Because the umbrella company is your employer, you will receive your pay from them for the work you do for the employment agency’s client (end client).
The payment process is as follows: the end client pays the agency for your work, who will deduct their fee for placing you in the position and pays the rest over to the umbrella company.
The rate you get paid from the umbrella company will be different because of the additional costs they need to cover to employ you. These are:
- Employer National Insurance contributions
- Auto-enrolment pension contributions
- Holiday pay
- Admin and other costs, such as Apprenticeship Levy
What are the costs involved in using an umbrella company?
The amount you pay for an umbrella company’s services varies from company to company and will affect your take-home pay, so it will likely be a large part of your decision in choosing your provider. We have another article that looks at fees in detail here.
Typical fees or margin is usually between £70 and £120 per month. Companies often run limited time promotions, and so their prices are not always shown on their website. Most, however, will be happy to provide a quote if you contact them.
Understanding your pay
Before you start your contract, the employment agency will give you a Key Information Document that contains the details of your pay. It will list all the deductions and fees affecting your pay and clarify the payment process and your contract rate.
This is what is set out in your contract, often called gross pay. It is usually an hourly rate and a bonus or additional pay added to it – all taxable, of course. After the deductions of Tax and National Insurance, Student Loan or workplace pension (auto-enrolment), we arrive at the net pay amount, or what we call your take-home pay.
As any other employer, the umbrella company is legally required to provide you with statutory annual leave (paid holiday) based on your hours. Also, any unused holiday pay owed to you should be paid when you leave your umbrella employer.
The payslip you receive will show the number of hours you worked in the pay period and also the pay rate for those hours if it varies. If you receive any statutory benefits such as sick pay, maternity or paternity leave, then these will show on there as well. You will be able to see the amount of all deductions made in the period, such as Tax, National Insurance, pension, student loan repayments etc. It is essential that you have a careful look at your payslip to make sure that nothing you didn’t agree to is being deducted.
What to be aware of?
Although efforts are being made, the umbrella sector is largely unregulated at the time of writing, so it is important to be vigilant when shopping around for an umbrella company.
Tax Avoidance Schemes
Some tax avoidance schemes set up umbrella companies and disguise income by converting them into loans. They trick you into avoiding paying tax, which is your responsibility, so HMRC will go after you in the end.
Click here to look at our other article that looks into tax avoidance schemes and lists all the red flag items you need to look out for.
Mini Umbrella Companies
The other scam recently featured in the news is the mini umbrella company fraud based on the abuse of two particular Government schemes, the VAT Flat Rate Scheme and the Employment Allowance.
Mini umbrella companies have some common features that might be challenging for a contractor to spot. You can find our dedicated article that looks into these in detail by clicking here.
What are the signs that you are dealing with a compliant business?
A compliant umbrella business will carry an industry accreditation from a reputable trade body like the FCSA (The Freelancer & Contractor Services Association). No FCSA Accredited Member is allowed to operate Offshore Schemes, Loan Schemes, Trusts, Managed Services Companies Schemes, Pay-day-by-Pay models or similar.
A genuine umbrella company will become your employer, give you full employment rights and pay all of your wages through HMRC’s PAYE (Pay as You Earn) system.
Why work with SmartWork?
SmartWork is an accredited FCSA member and undergoes a yearly audit to demonstrate full compliance with HMRC and the trade body’s strict code of conduct.
Our umbrella package is provided with a host of additional benefits:
- We process statutory sick pay, maternity/paternity and holiday pay and can assist you with mortgage advice and references.
- We cover you for all of your work-based insurances, including Professional Indemnity and Employers/Public Liability are included with our service.
- We are proud of our personalised service that provides each of our workers with a dedicated account manager.
- Our SmartWork portal allows our contractors to upload timesheets, submit expenses and e-sign documents easily.
As always, if you’d like to get in touch with SmartWork, please feel free to call us on 0800 434 6446 or send us an e-mail at email@example.com.