Nobody likes to get caught in the rain, and if you’re a temp worker or contractor, then dealing with payroll and tax requirements can feel like you’ve left the house without a raincoat – annoying and liable to put a dampener on your mood.
If you don’t fancy being the Director of your own limited company (or Personal Services Company, PSC) and/or your end client (or agency) wants to outsource their payroll responsibilities, then choosing the “brolly” of an umbrella company is the smart way to go for a stressless life when it comes to payments.
These are companies that make temporary workers’ lives far easier by handling their payroll. In this post, we’ll explore these companies in more detail, both how they work and how to choose the right one!
What is an Umbrella Company?
Umbrella companies take care of temporary workers’ payroll, NICs (National Insurance Contributions) and tax deductions and send them to HMRC, rather than the temporary worker having to do it themselves or the employer/agency having to enlist them on their own payroll.
This means workers don’t need to become the Director of their own personal, limited company, and it means that the umbrella company takes on the PAYE responsibilities and becomes the contractor’s employer, rather than the end-client or agency needing to take care of payroll. In other words, it makes tax and payments much easier for both the employee and the employer alike. So far, so good!
How Many People Use Umbrella Companies in the UK?
Over half a million employees are working through umbrella companies in the UK. That’s almost as many umbrellas as you’ll find on a rainy, Scottish golf course during The Open. But probably still not quite as many, mind you… To put that into a more useful context, that’s around 1.5% of the UK working population.
It’s important at this point to talk briefly about IR35. Without an umbrella company, individuals may have to worry about this legislation, whereas if you use an umbrella company – well, we’ve written more below.
IR35 is a piece of tax legislation (also known as off-payroll working rules) designed so that contractors and temporary workers pay the same tax that permanent employees do. IR35 is typically determined by the end-client, rather than the temporary worker. With an umbrella company, workers don’t need to worry about IR35.
Umbrella companies offer flexibility while providing employee benefits (like holiday pay). The number of umbrella employees has shot up over recent years. Findings from HMRC estimated that the number of umbrella employees in the 07/08 tax year was only 100,000.
Cut to today and that figure of over 500,000, and you see just what a massive increase there’s been in less than two decades. Umbrella employees run the temporary staffing gamut, from nurses and HCAs to supply teachers and cleaners, and everything in between.
What are the Benefits of Using an Umbrella Company?
There are many benefits to using an umbrella company, with the main one being that it makes everybody’s life far easier regarding tax and payroll. All an employee must do, once they’ve signed a contract with an umbrella company, is submit their timesheets, and the umbrella will take care of the rest. No hassle, no drama, and most importantly, no nasty surprises. What’s not to like?
Other benefits include:
- Cutting out administrative faff
- They’re cheaper than hiring an accountant to help with self-assessment tax returns (rates vary, with weekly fees typically between £20 and £30).
- Very few (if any) hidden costs
- Entitlement to employee benefits
- Insurance included (professional indemnity, public liability, and employer’s liability)
- You’re paid on time
And when it comes to tax return/self-assessment season? Well, there’ll be no frustrating form-filling needed for you to do.
Are there any Drawbacks to Using an Umbrella Company?
As practical and helpful as umbrella companies can be, there are still some disadvantages to utilising them. If you’re not careful and choose a “dodgy” umbrella company, you may find yourself unwittingly embroiled in a tax avoidance scheme. This, as you might have already guessed, is something that you want to avoid at all costs (pun only slightly intended).
Another disadvantage to utilising an umbrella company is that you don’t retain as much money as you would by being the Director of a limited company. With the latter, you don’t have to pay a margin or fee, whereas with the former, you do. However, when it comes down to pure convenience, umbrella companies offer a highly effective solution.
It’s also worth noting that it is near-impossible to claim expenses like travel and accommodation through umbrella companies anymore since virtually all temporary employment falls under supervision, direction or control (SDC) legislation.
The Importance of Due Diligence When Choosing an Umbrella Company
There has been a stigma surrounding umbrella companies in the past, mainly since, for the most part, there’s not a whole lot of regulation in the sector. This leaves employees vulnerable to scams and other less-than-scrupulous practices from certain umbrellas.
Non-compliance has long been flagged as an issue, so it’s vital that you use an umbrella that’s approved by the Freelancer & Contractor Services Association (FCSA). This regulatory body is dedicated to supporting and protecting anybody and everybody working in the temporary staffing sector.
FCSA Accreditation
If the FCSA accredits an umbrella company, you know it has reached an elevated level of compliance that other non-accredited umbrellas haven’t. If you source your temporary work through an agency, they will typically have an approved list of umbrella companies (all approved by the FCSA) from which to choose (also known as a preferred supplier list or PSL).
There are hundreds of umbrella companies working throughout the UK, but there are under one hundred FCSA-accredited umbrella companies. You can see, then, how easy it would be to choose a non-compliant umbrella if you weren’t careful. If you want to know which umbrella companies we’d advise using, contact us!
Think of it this way: if FCSA-accredited umbrellas are like giant, shiny, brand-new umbrellas, then non-accredited umbrellas are like those umbrellas with holes in, that are flimsy in the wind and that end up getting you wetter than you would’ve done without one.
How the Process Works With an Umbrella Company
Working through an umbrella company is easy. When you start a new temporary position, you’ll choose an umbrella company through the agency if you’re using one, or you can find an FCSA-approved umbrella yourself if not.
Sign Up With the Umbrella
You’ll then sign up with the umbrella and provide them with various documents, including proof of identity and right to work (often in the form of a P45). The next step is for the employee to sign an employment contract between themselves and the umbrella company, and after that, they’re good to go.
Submitting Timesheets and Invoicing Agency/End-Client
Employees provide the umbrella with their timesheet (usually weekly, though the umbrella will clarify this), and they will then invoice either the end-client, if there’s no agency involved, or the agency.
Payment
Once paid, the umbrella company will process tax deductions as well as take their margin (this is how the umbrella company makes its money) and pay the employee what they’re owed.
Final Thoughts
So, there you have it. Our in-depth guide to umbrella companies, what they are, how they work, and what helps distinguish between credible umbrella companies and those simply trying to rinse you for your hard-earned cash.
