When taking up a temporary or interim post, your agency may make you aware of an alternative to being paid directly through them. This alternative is an Umbrella Company.

In its most basic form, an Umbrella Company acts as your employer and invoices your client (or agency) for the work that you do. When the client (or agency) pays your Umbrella Company, the Umbrella Company will deduct all relevant taxes and pay your salary over to you. If your only source of income is through your umbrella company, then you will not need to fill out any self-assessment forms, or file any tax returns; your umbrella company will take care of everything. And when the time comes for you to move on, your Umbrella Company will issue you with your P45.

If you are given the option of working through an Umbrella Company, you should find that the Umbrella rate is higher than the direct (PAYE) rate. This is because if you are employed through an umbrella company you are liable to pay your employers NI, rather than it being absorbed by your employer. Umbrella Companies are unable (and unwilling) to absorb this cost themselves as the only money they make from contractors, is from the weekly (or monthly) fee they charge.

Using an Umbrella Company can also be a good alternative to becoming self employed. You can get many of the same benefits of self-employment, but with much less administrative burden.

It only takes one quick search on Google to find out that there are hundreds of Umbrella Companies operating in the UK. Many so called ‘impartial’ websites are not actually as unbiased as they appear, and a quick look between their umbrella company recommendations and advertisers on their website confirms this.

All Umbrella Companies have to operate in line with guidelines set out by the HMRC. This means that no Umbrella Company can guarantee that your earnings will be higher than another; the only differences between Umbrella Companies will be the level of service that they offer their contractors and the fee that they charge. You should avoid Umbrella Companies that charge a percentage fee based on what you earn. Companies that do this are essentially profiting from your hard work!

The fee that Umbrella Companies charge is treated in the same way as expenses, in that it is deducted before tax. As a result the amount that you actually lose from your salary can often vary from week to week depending on the level of expenses that you claim, your tax code and whether you are a high rate (40%) or low rate (20%) tax payer. The figures that Umbrella Companies will often quote will be the amount you will pay (after tax) if you are a high rate tax payer. Make sure you find out both the before and after tax amount so you are able to compare umbrella companies more accurately.

For your weekly (or monthly) fee, your umbrella company should also give you Professional Imdemnity, Employers Liability and Public Liability Insurance. Most agencies or clients will insist on these being present and valid before they will let you use an umbrella company.

Whilst many Umbrella Companies advertise similar offerings, contractors should always check the fine print of any agreements. Often expenses and dispensations are used as a selling point, but remember that it is the contractor and not the Umbrella Company who is liable should the HMRC decide that expenses have been incorrectly claimed. Common ‘allowable’ expenses include mileage, travel (e.g. Train), hotel costs, subsistence and professional subscriptions. Your Umbrella Company should only allow you to claim expenses which are ‘wholly, exclusively and necessarily incurred in the completion of your contract’.

Umbrella Companies will also all say that they are IR35 compliant (something which Redego does), because legislation has meant that all Umbrella Companies now have to pay their contractors via PAYE, meaning that all Umbrella Companies are ‘inside’ IR35.

When choosing an Umbrella Company, you should always bear in mind that if sounds too good to be true, then it probably is!

For more information on Umbrella Companies, or the Umbrella service that Redego offers, please get in touch!