What is an umbrella company?

In the United Kingdom, an umbrella company employs many independent contractors who work under temporary contract, usually through a specialist employment agency all under one umbrella (hence the name umbrella company). Recruitment agencies can only issue contracts to a limited company so the umbrella company acts as that limited company and deals with all the administration on your behalf.

Since the introduction of the Managed Service Company (MSC) legislation in the budget of 2007, the easiest way for many independent contractors to comply with UK regulations is to set up his or her operations through an umbrella company. An umbrella company will issue invoices to the recruitment agency (or end client) and, when payment of the invoice is made, will typically pay the contractor through PAYE.

Expenses Benefit

Now you have established that you become an employee of the umbrella company we will talk very briefly about the benefits of working through one.

If your workplace is regarded as temporary you will gain the right to submit expense claims for any out of pocket expenses that have been incurred as part of you fulfilling your duties. Your umbrella company should be checking whether your workplace is temporary or not, if they make no check on this then how they operate is very questionable and umbrelladetective.com would like to know about it.

Popularity

Umbrella companies have become more prevalent since the British government introduced so-called "IR35" legislation that creates tests to determine employment status and ability to make use of small company tax relief's.

Before IR35 was introduced, workers who owned their own companies were allowed to receive payments from clients direct to the company and to use the company revenue as would any small company. Company profits could be distributed as dividends, which are not subject to National Insurance payments. Workers could also save tax by splitting ownership of the company with family members in order to place income in lower tax bands.

The majority of umbrella companies use the same PAYE calculations to ascertain how much tax you should be paying. The main differences you will find between umbrella companies will be the administration fee that they charge and the level of service that they provide to you.