Umbrella 101 – What is an Umbrella Company?
April 6th and IR35 is here. Your agency has told you, you fall inside of IR35 and you now need to use an umbrella company. But what is an umbrella company? What does it do?
While there is no current legal definition of an umbrella company within the legislation, at the time of writing Wikipedia describes an umbrella company as “a company that employs agency contractors who work on temporary contract assignments, usually through a recruitment agency in the United Kingdom.”
Where does an umbrella company fit into it all?
In a nutshell, Wikipedia’s definition explains in brief exactly what an umbrella company is. The umbrella company employs a range of workers with various skill sets. It then supplies services (using these skillsets) to an agency which in turn supplies services to an end client. When the work has been undertaken, the umbrella company invoices the agency for the hours/days that have been supplied and in turn, the agency then invoices the end client for those same hours/days. The End client then pays the agency who pays the umbrella company who then pays the worker their agreed Salary Rate (which should be stated in the worker’s Contract of Employment with the Umbrella Company).
Admittedly this can sound like a complicated and long-winded process and is often easier to understand when broken down into three stages:
Why can’t the agency or end client pay me directly?
The Conduct of Employment Agencies and Employment Business Regulations 2003 prevents the employment business or agency from paying sole traders or self-employed contractors directly without first making the relevant tax and NI deductions.
In essence, the agency is forced to employ you themselves or pass on that responsibility to an intermediary such as a Limited company or Umbrella Company (which is often the more preferable option as the liability for all the employer and employee contributions is passed over to the intermediary as well).
What’s the difference? Agency PAYE vs Umbrella PAYE
So if you are a self-employed contractor who doesn’t want or can’t use a personal Limited Company your options are Agency PAYE payroll or Umbrella PAYE Payroll. What’s the difference? In terms of how the salary payments are calculated, not a lot as they both function in similar ways. The difference lies in your workflow as a contractor.
If you want to undertake multiple assignments but don’t want the hassle of keeping track of multiple employments with different agencies, bookkeeping, accounts and a self-assessment every year (not to mention what that can do to your tax code), and you want to retain the flexibility of picking your assignments and working hours (which would be lost by taking a permanent role), using an umbrella company is a good choice.
Being an employed contractor with an umbrella company provides you with a single employer who can process payments from multiple sources (acting a bit like a funnel for all your payments) and will deduct all the relevant tax and NI from your salary payments on a real-time basis for a small fee (which is also a cheaper option over engaging an accountant).
An umbrella company also provides you with a single P60 at the end of each tax year, allows you to accrue and provides employee benefits such as Statutory Sick Pay (SSP) and Maternity Pay (SMP), while still allowing you the flexibility to pick up and work multiple temporary assignments or ‘contracts’ offered by multiple agencies throughout the year.
When your workflow operates in this way an umbrella company is your best choice to streamline and simplify your payment process.
Is the Umbrella Option the best one for me?
It’s hard to give a simple ‘yes’ or ‘no’ response when someone asks if they should use an Umbrella Company. This is because everyone’s situation is different and everyone has different external factors which can impact this choice, especially if you are being asked to move away from your own Limited company.
If you are unsure, it is always recommended that you do your research, start by speaking with an umbrella company or two and see what kind of advice they can offer or are willing to offer. Do they try and find out about your situation so the information they can provide is as accurate as possible or do they offer you a generic answer?
The type of customer service you get from any company is always a good indicator of how they operate. Are the staff happy to take the time to get to know and find out your situation to provide help where they can? If they don’t know the answer do they admit this and point you in the direction of someone who can? If they don’t believe their company is the right fit for you, will they tell you? While the last one is rare, there are companies out there who do take this position.
Swanhealth believes we are a company that fulfils these criteria, if you are in the market for or think you might need an umbrella company, give us a call and put us to the test. Please do not hesitate to contact us.