Contracting in the UK
Claim business expenses as an umbrella employee
You will be able claim the business expenses on your behalf once you provided the receipts of the business related expenses , if certain factors in your contract are meet
What else do they offer contractors?
- After registering, you will become an employee of the company. Thus, you will come under their insurance which makes working safe.
- Some Umbrella companies offer discounts on the healthcare to provide you an extra benefit.
- The professional staff of the service provider will give you financial advice through you can improve your earnings.
- The amount of the tax will be automatically deducted from your payments before sending it to you, which means you will never face taxman at your door.
- No cash is required to join
Why contractors prefer working through umbrella companies
If you wonder why to use one, you need to read some reviews by the other contractors. You will quickly realize that contractors love working through them. They can provide many benefits to the contractors along with excellent services and help with the contractor tax.
If you want to make a decision, you should learn about different benefits. If you can understand the following benefits, you will probably find a good reason to work through via one.
When you work through umbrella companies, you do not have to worry about your administrative issues. They will work on your administration through an expert team. Therefore, you can easily leave an entire headache to them.
They will not only help contractors with the administrative side of their work, but they will also take care of your tax matters. Tax will not be a problem anymore. Any contractor facing problems with contractor tax should consider using umbrella companies for management of contractor tax. Things will become easy with the help of these companies.
The umbrella business will ensure that you are getting the best financial advice since most of these companies have a panel of finance experts serving the contractors in their financial matters.
You will also enjoy many permanent employment rights. This means that you do not have to worry about missing on some of the best mortgage deals just because you are not a permanent employee.
What is the actual definition of an umbrella company
The statistics of a recent survey have shown that a large number of people living in the UK have left their permanent jobs and are opting forcontracting to earn their livelihood. The reasons for this shifting may be numerous, but the basic one is the incentive of earning more being a contractor. They can increase their monthly income by working as many hours as they can.
Moreover, contractors can manage the working schedule according to their needs and spare valuable time to be spent with their families and loved ones. You can control your budget by anticipating your monthly expenses and work accordingly. The contractors can earn relatively more than an equivalent permanent job can offer.
Umbrella Companies are gaining fame with each passing day among most of the contractors, and they are satisfied as far as their working relationship with such companies is concerned. The top rated Umbrella providers offer such benefits that render contracting as more profitable and ideal replacement for a permanent job.
Contractors can search for new contracts instead of wasting their time during processing of invoices or filing tax returns. Your provider will take care of all such matters so that you can concentrate on the work.
The clients prefer those contractors who are working via one. The reason for this preference is the factor that such contractors can manage their administrative matters in a better way. As stated above, these companies handle all the paperwork for contractors giving them room to perform their contract related responsibilities.
Contractors while working through Umbrella Companies can enjoy almost all the employment benefits offered to a permanent employee. Top-rated and experienced provider can assure you to have these employment benefits. These include sick pay, maternity pay, holiday pay and adoption leaves. In addition to this, contractors may get insurance cover, indemnity cover, and employer’s liability cover.
You can have the privilege of paying less tax by claiming business expenses. This feature of Umbrella Companies is beneficial for you in a dual manner. By claiming your business expenses, your taxable income is minimized and as a result, the payable tax is decreased considerably. Similarly, you can get an increased take-home pay by claiming such expenses. To get such advantage, you need to provide the receipts of expenses you have incurred during business. Your umbrella company will claim these on your behalf once you have submitted the receipts.
Some additional benefits are explained below.
- Being an employee of an Umbrella Company, you can get discounts on health care services.
- The professional accountant of your company is available for any financial assistance and advice.
- Your tax is deducted automatically from your pay so you can maintain a good tax history.
- The registration process is free, and you can join any Umbrella company of your choice by submitting an online form.
- After signing the overarching contract of employment with your provider, you become an employee of such company and get your payment secured through its insurance cover.
Tips for finding the best umbrella company
Freelancers and contractors are usually worried about their tax issues. In fact, contractor tax has become a sort of mystery after theintroduction of IR35 legislation. If you do not want to fall into the trouble with the taxman, you should consider joining.
When you join an umbrella company, you get many services along with contractor tax related services. You will have a panel of financial advisors working just for the contractors. They will advise you about many things including investment and pensions-related issues. You will also find services related to payroll processing. In fact, all the companies will offer payroll processing since it enables the company to handle your tax related matters. To achieve this, the company will be offering you employment status. You will also get some employment rights when you get such status.
When it comes to picking the best umbrella, you have to look at its services. You have to make sure that the company provides all the basic services usually offered by other companies. After checking the basic services with an umbrella company, you have to check the company for additional benefits and services. If a company provides additional benefits, you should shortlist it for further research about that company.
You should also consider payroll processing since it would be a major service. If the company provides quick payroll processing, you can consider it a good company. Usually, companies will process payroll on the same day. However, if a company does not make any clear statement about it, you can ignore it.
You should also read reviews on the internet about different umbrella companies. When you read reviews, people will write why to use one. Ignore such reviews and look for reviews with technical and services related issues. Such reviews will prove out to be the great help.
Umbrella Company – Important Terms
An umbrella company can help contractors in some ways. Contractors who are already inside IR35 can enjoy a peaceful work environment, free from any kind of an administrative hassle and tax related responsibilities. Similarly, contractors who are only looking to try contracting will also find umbrella companies to be their best possible solution. Contractors with multiple short-term contracts also benefit a great deal
Umbrella companies have become so popular among contractors in the UK that many permanent employees are quitting their employment to become contractors through the model. This provides them with benefits similar to permanent employment but provides them with a far greater horizon. They can earn more and work more dedicatedly.
Similarly, many contractors who were working through a limited company are making a switch because they feel they can do better when there is no administrative hassle that they live with as a company director.
All these contractors looking for these business come across a number of terms (jargon) that they are unfamiliar with. The majority of these terms are important as they help you understand what an umbrella company means when it uses any of these terms. Similarly, it will help you evaluate opinion of experts as you will be able to comprehend what they say. We have prepared a comprehensive list that covers pretty much everything that you should know before you start reading other things about umbrella companies. Go through the list, take notes, and write to us if you feel you need to know more about anything.
Pay As You Earn (PAYE) is a system used by employers across the UK to deduct tax and NI contributions for their employees at the time of sending payslips. This method provides extreme convenience and doesn’t put the burden on the employee. Umbrella companies in the UK are required to use PAYE system since contractors working through these companies will be treated as if they were employees and their umbrella companies were their employers. Umbrella companies will deduct tax and NI contributions just like an employer.
IR35 is a contractor-related legislation. It determines the nature of work, whether it is employment or contracting. The contractors falling within the definition of employment under IR35 will be better off going ahead with an umbrella company since joining an umbrella isn’t going to change their IR35 status at all.
Many large businesses enjoy dispensation from submitting invoices for regular office expenses. Instead, they are provided a certain bracket of expenses that they can claim for day to day business expenses. This bracket is decided by the taxman after considering the actual expenses and their regularity. However, some umbrella companies will advertise that they are offering dispensation and contractors (who would be their employees) can benefit from that. This isn’t true. A dispensation is only for the company and not for its employees. So beware of that when you come across any similar claims.
Indemnity and professional cover
Since an umbrella provides an employment cover through an overarching contract of employment, it should also provide professional indemnity cover and employers’ liability insurance. As a standard, the majority of companies offer these covers along with healthcare and few other similar benefits.
Limited company means a company limited by liability. This is probably the simplest and the most common form of company that one can incorporate under the Companies Act. As opposed to an umbrella company, contractors working through the limited company will be director of their company. As a result, they will have full control on various affairs of their business that umbrella contractors lack. Additionally, a limited company usually proves to be more tax efficient for the majority of contractors.
Managed Services Company
Managed Services Company (MSC) is a company that is managed by the service provider instead of the shareholders and contractors. The company is offered as a managed solution so that contractors can focus on their work and other business affairs while leaving company management to the service provider. These companies were once popular, but they have fallen out of favor ever since people started using them for tax avoidance purposes.
The IR35 status of contractors working in the UK is not dependent on their payment structure. However, it depends on the nature of a contract between a contractor’s limited or Umbrella Company and the end client. Apart from this, their working arrangements are also considered in this regard.
Since the introduction of Managed Service Company Legislation, the only Umbrella option available for contractors is the PAYE Umbrella. If a contractor works through PAYE Umbrella, all the tax is calculated as it is done in the case of permanent employees. Contractors using PAYE Umbrella are treated in the same way as regular employees. It is possible to be a part of PAYE Umbrella if a contractor is outside IR35. However, for long-term contractors, it would amount to a loss regarding significant tax advantages. Limited Company is considered as the best option for such high earners if they are looking for more tax efficient payment structure.
Contractors can mitigate their tax burden by claiming the business expenses if they are working through Umbrella option. Although the amount of take-home pay is relatively higher via limited company as compared to PAYE, yet it is a viable option for first timer contractors.
Is it possible to avoid IR35?
”Contractors to undo the financial impact of IR35 legislation should ensure that their contract and working relationship keep them outside IR35.”
It is advised that contractors must start considering IR35 before signing a new contract. They should seek professional advice to get their contract reviewed in line with the IR35 legislation.
The next step after choosing an one is joining it. The overall procedure is simple to follow and hassle free. Mostly it takes 24 hours to become a part of Umbrella Company, and there is little to do for a contractor in this regard. Following are the steps, which should be kept in mind before you start working with such company.
Your client or agent should be informed
Signing of a contract
Bank details and personal data
All your personal details and bank related data is required to be entered by you into a form. This is necessary as contractor’s address and his/her bank details are vital for the credit transfer. So be careful while filling the form as all your future transactions are dependent on your correct credentials.
Submit form P45 for tax details
If a contractor switches from one Umbrella Company to another, it is required to submit form p45 to gain acquaintance regarding previous tax details. If you cannot provide form45, then your company will issue a form 46 to get the previous tax code so that it may transfer your pay after deducting tax and NI contributions.
Contract between provider and contractor
Umbrella Companies and the contractors enter into a contractual obligation by signing an overarching contract. This would specify the terms and conditions for which both the parties are bound. It also creates a relationship of employer and employee between these two and allows various employment benefits to the contractors.