Budget Tax Implications for Umbrella Company Freelancers

PAYE Umbrella Company

The PAYE Umbrella Company has come even more to the fore with the abolition of Composite Companies. The two options left for contractors are the PAYE Umbrella Company and Limited Companies.

Those service providers who provided a safe and reliable PAYE Umbrella Company option are now seeing the benefits of not sailing too close to the wind in providing safe and reliable Umbrella Companies.

Government plans new initiatives to help new enterprises

The government is keen to see small businesses grow and to help this happen it has launched some new initiatives. It has also been announced that the New Enterprise Allowance scheme is to be extended in the hope of creating up to 40,000 new companies by 2013.

Umbrella companies barred from fiddling National Minimum Wage calculations

Updated National Minimum Wage Regulations came into effect on 1st January 2011, which prevent umbrella companies from using travel and subsistence expenses in the calculation of the NMW.

Union asks HMRC to clamp down on false self employment practices of payroll companies

Construction union, UCATT, has urged HMRC to investigate how some payroll companies have been registering workers as ‘self employed’ in order to slash employers’ National Insurance bills.

HMRC crack down on unscrupulous umbrella companies

Amendments to the National Minimum Wage Regulations came into force on the 1st of January this year and umbrella company contractors should be aware of their implications.

What is an Umbrella Company

An umbrella company is a company that acts as an employer to Agency contractors who work under a fixed term contract assignment, usually through a Recruitment Employment Agency in the United Kingdom. Recruitment agencies issue contracts to a limited company as the agency liability would be reduced. It issues invoices to the recruitment agency (or client) and, when payment of the invoice is made, will typically pay the contractor through PAYE with the added benefit of offsetting some of the income through claiming expenses such as Travel, Meals, and Accommodation

Umbrella Company vs Limited Company

Once you secure a contract, your recruitment agency will ask you to find a payroll solution to make sure you receive payment. Basically, there are 3 options:
1. Umbrella company;
2. Limited company;
3. PAYE through the recruitment agency / end client.
There is no right or wrong option but the ‘best’ choice will depend on the contractor’s circumstances such as the length of the contract, whether the contract is a stop gap or a long term arrangement, whether the contract is affected by IR35 and how little / much accountability the contractor would like over their tax & NIC.
An umbrella company is the easiest option to process your payroll as there are no issues surrounding IR35, tax liability, paperwork or hassle with the setting up / maintaining or with the dissolving of a Ltd company. An umbrella company will manage your tax affairs and remove the admin burden. The umbrella company should also provide you with professional insurances, a business manager to manage your account and an expenses policy to help contractors offset their expenses. The payroll is PAYE and is a straight forward process, which requires no involvement from the contractor.
If you decide to run your payroll through a limited company then you’ll need to start forming your company as soon as you secure your first contract. Once your company is formed, this will ensure you can then raise invoices and set up your company bank account. Having chosen a company name you’ll need to check that it is available. You will then be responsible for running and maintaining your own Ltd Company, whilst you carry out your contract by completing forms such as VAT returns, tax returns, & annual returns. You will need to find a reliable and trustworthy accountant to support you with these forms, whilst ensuring that you receive a regular payroll. You will also need to keep hold of all your receipts so that your accountant can help complete the relevant forms. Your accountant will be able to help you with your tax and NIC & IR35 status but it is yourself who is fundamentally responsible.
Processing your payroll directly through the recruitment agency / client is also an option but many recruitment agencies / clients prefer for this option to be avoided. The payroll is PAYE but unlike umbrella companies, there is no option to offset any business expenses against the tax and NIC and therefore the take home pay will not be as good as through an umbrella service / Ltd company. You will be required to submit a P45/P46 and you will receive a P60 at the end of the financial year.

What is an umbrella company?

Most people will only come across an umbrella company if they are in a contract so do not worry if you are feeling a little confused. Whilst you are carrying out your research you may also come across various terms for an umbrella company such as a contract umbrella, contract umbrella company, contracting umbrella company, contractor umbrella company, IT contractor umbrella, IT contractor umbrella IT umbrella company, Limited umbrella, Ltd umbrella company, umbrella companies IT, umbrella limited companies, & umbrella limited company.
Whatever the terminology, in its simplest form, an umbrella company processes a PAYE payroll for contractors whilst offsetting business expenses against their tax, without having to worry about the IR35 legislation.
An umbrella company is a company that acts as an employer to contractors who are in a contracted assignment, usually through a recruitment agency. Recruitment agencies issue contracts to a limited company as the agency liability would be reduced.
Your umbrella company will liase with the agency / client to ensure that all details have been gathered so that all the contracts, documents and schedules are on file. Your details will also need to be collected to clarify your identity and to ensure that you get paid.
Your chosen umbrella company will issue you with an employment contract once your contract has been secured, which will provide you with an employee status.
You may be asking “How do I get paid?” The umbrella company issues an invoice to the recruitment agency (or client) upon receiving a timesheet from the contractor. The recruitment agency will pay the umbrella company, who will in turn pay the contractor through PAYE with the added benefit of offsetting some of the income through claiming business expenses such as travel, meals, accommodation and work equipment. As employees, contractors working through umbrella companies are also able to become more tax efficient by utilising salary sacrifice schemes such as childcare vouchers, pension scheme, mobile plan, charity donations and a Bike to Work Scheme. As employees of the umbrella company, contractors should be entitled to benefits such as professional insurances, discounted training courses, shopping discounts and health insurances.
If the agency / client have agreed that business expenses will be reimbursed, then your umbrella company will invoice (better known as a 3rd party invoice) the agency / client once the expense receipts have been submitted. The agency / client will pay the umbrella company, who will in turn process payment to the contractor.
As your employer, the umbrella company will apply a relevant tax code once a P45 or P46 has been submitted. Once submitted, the umbrella company will be able to maximise your personal allowance and contractors will receive a payslip to support their payroll. As an employer, umbrella companies will also produce a P60 at the end of the financial year and a P45 once employment has ended.
As an employee, the contractor is entitled to employment rights such as holiday & sickness pay, maternity & paternity leave, minimum wage, etc.
Umbrella companies have become more of a requirement since the British government introduced IR35 legislation in 1999. Umbrella companies are a hassle free way of working whilst allowing contractors to increase their take home pay compared to being paid PAYE through the recruitment agency or client. See how much more you can take home by using our free umbrella salary calculator.

Most people will only come across an umbrella company if they are in a contract so do not worry if you are feeling a little confused. Whilst you are carrying out your research you may also come across various terms for an umbrella company such as a contract umbrella, contract umbrella company, contracting umbrella company, contractor umbrella company, IT contractor umbrella, IT contractor umbrella IT umbrella company, Limited umbrella, Ltd umbrella company, umbrella companies IT, umbrella limited companies, & umbrella limited company.
Whatever the terminology, in its simplest form, an umbrella company processes a PAYE payroll for contractors whilst offsetting business expenses against their tax, without having to worry about the IR35 legislation.
An umbrella company is a company that acts as an employer to contractors who are in a contracted assignment, usually through a recruitment agency. Recruitment agencies issue contracts to a limited company as the agency liability would be reduced.
Your umbrella company will liase with the agency / client to ensure that all details have been gathered so that all the contracts, documents and schedules are on file. Your details will also need to be collected to clarify your identity and to ensure that you get paid.
Your chosen umbrella company will issue you with an employment contract once your contract has been secured, which will provide you with an employee status.
You may be asking “How do I get paid?” The umbrella company issues an invoice to the recruitment agency (or client) upon receiving a timesheet from the contractor. The recruitment agency will pay the umbrella company, who will in turn pay the contractor through PAYE with the added benefit of offsetting some of the income through claiming business expenses such as travel, meals, accommodation and work equipment. As employees, contractors working through umbrella companies are also able to become more tax efficient by utilising salary sacrifice schemes such as childcare vouchers, pension scheme, mobile plan, charity donations and a Bike to Work Scheme. As employees of the umbrella company, contractors should be entitled to benefits such as professional insurances, discounted training courses, shopping discounts and health insurances.
If the agency / client have agreed that business expenses will be reimbursed, then your umbrella company will invoice (better known as a 3rd party invoice) the agency / client once the expense receipts have been submitted. The agency / client will pay the umbrella company, who will in turn process payment to the contractor.
As your employer, the umbrella company will apply a relevant tax code once a P45 or P46 has been submitted. Once submitted, the umbrella company will be able to maximise your personal allowance and contractors will receive a payslip to support their payroll. As an employer, umbrella companies will also produce a P60 at the end of the financial year and a P45 once employment has ended.
As an employee, the contractor is entitled to employment rights such as holiday & sickness pay, maternity & paternity leave, minimum wage, etc.
Umbrella companies have become more of a requirement since the British government introduced IR35 legislation in 1999. Umbrella companies are a hassle free way of working whilst allowing contractors to increase their take home pay compared to being paid PAYE through the recruitment agency or client. See how much more you can take home by using our free umbrella salary calculator.

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