Are you a contractor? If you work for someone else, it is important to know whether you are working for that person in an employed capacity or in a self-employed capacity as an independent contractor.
Your employment status will determine the charge to tax on income from your employment or self-employment. It will also determine the class of NICs, which are to be paid.
Umbrella Companies employ you for tax purposes and complete central returns for all their contractors. It's less hassle and more flexible for you but take home pay is typically less than that the limited company option.
The best option for you depends on your plans, 'one off' contract or 'contractor for life'? [Read More...]
If you want to use an umbrella company you can either register online with any of the top 100 umbrella companies here at Contractor Supermarket, or give them a call. What can you expect when calling an umbrella company for the first time?
Umbrella Company: Good morning ABC Umbrella Company.
Contractor: Hi, I've just got my first contract. And I've been told to find an umbrella company.
Umbrella Company: Yes, you've come through to the right place, hold on and I'll pop you through to the registration department.
Umbrella Company: Hi, you're through to registrations, how can I help you?
Contractor: I've just got my first contract and my agency's told me to find an umbrella company. And I don't really know what an umbrella company is.
Umbrella Company: Alright, don't worry, not many first time contractors have heard about umbrella companies.
Contractor: Or what an umbrella company does!
Umbrella Company: Let's take it from the top then shall we?
Contractor: Yes, please. In simple plain language, please.
Umbrella Company: So is this the first time you've contracted?
Contractor: Yes, I've never contracted before and never heard of an umbrella company either.
Umbrella Company: Ok and previously you've been in full time employment?
Contractor: Yes, up to now I've only ever worked for a company as an employee.
Umbrella Company: Ok fine. As a contractor in the UK, at the moment, you've got three options open to you. So in no particular order, you could, if the agency runs one and offers it to you; you could go on their PAYE payroll and be paid directly on the payroll of your recruitment agency.
Not all recruitment agencies offer that services so don't be alarmed if that option hasn't been put to you. If you don't want to do that or if that option isn't offered to you, the two remaining options require you to get what's called limited company status.
Contractor: Ok, so I need to be part of a limited company in some way?
Umbrella Company: Yes. All that means in layman terms is that you need to somehow attach yourself to a limited company.
Contractor: Ok, so how is that done?
Umbrella Company: You could set up, run and manage your own limited company and be a director. You'll need to raise invoices through your own company and appoint some accountants to do your end of year books. And your annual returns and all the rest of it that goes with running your own limited company.
Or you could do what is far easier, in terms of administration, and what many contractors do, and that's use an umbrella company.
Contractor: OK, so there are companies around that will do all my paperwork for me?
Umbrella Company: Yes. So to answer your question, initially, of 'What is an umbrella company?', we're an umbrella company and provide payroll solutions for contractors together with all the associated administration and paperwork.
Contractor: That sounds just what I'm looking for. What would I need to do?
Umbrella Company: It's very simple in that we would ask you to send us a timesheet at the end of each week.
Contractor: Ok, I think even I could manage that!
Umbrella Company: You're quite right, there's not much for the contractor to do at all. You need to send your timesheet to your agency, and we only need a copy of that same timesheet. Once we get a copy of your timesheet we would then raise an invoice to the agency for your hours worked, calculated on your agreed hourly rate.
We do this on the same day you send us your timesheet so there's no delay.
Contractor: Ok, that sounds pretty efficient.
Umbrella Company: Once your agency gets our invoice for your hours worked, the agency would then pay us, as your employer.
Contractor: Right. So you do the invoicing for me and also are responsible for making sure they pay on time?
Umbrella Company: That's exactly right. Now, when the agency has paid us, and as soon as we've got your money in from them, we would then put you through our payroll.
Contractor: I see, and how quickly do you run my payroll once the recruitment agency has paid you?
Umbrella Company: We run a payroll every working day. So the day we get money in from your agency, we'd put you through the payroll and at that stage, we do two things for you, we calculate the required deductions that need to be paid to Revenue and Customs...
Contractor: Great, so at least I don't have to calculate my taxes myself.
Umbrella Company: That's right. For national insurances and tax we make sure that those are paid to HMRC but what we'll also do is look to reduce your tax as much as we can. And we do that by looking at your allowable business expenses as a contractor.
The government will allow you to get tax relief on some of your expenses. So if you're incurring a cost in doing your contract, a cost that you personally are incurring, you don't bill it onto your client, instead we off-set it against your tax bill. Typically that would include getting to and from work each day.
Contractor: Ok, so getting to and from my temporary workplace is an allowed tax?
Umbrella Company: Yes, and an expense called subsistence, that's to say food and drink, when you're at your contract site. Now, if for the sake of argument, your train ticket there and back and your lunch every day, totals £50, let's say, purely for example.
Contractor: But I'm going to drive to work, is that allowed instead of public transport?
Umbrella Company: Yes and the same principle applies. If you're driving, your mileage is allowed at a rate of 40p a mile.
Contractor: Ok, so I can claim travel whether it's by car or train or bus?
Umbrella Company: That's right. We'll total an amount, so let's say the amount, either through public transport or through a mileage allowance, you claim a total of £50, and then let's say again, just purely as an illustration; we're billing £100 a day for you.
Contractor: Ok, I'm with you so far!
Umbrella Company: At the end of the week, we're going to raise an invoice for £500. That's your gross invoice value based on your agreed hourly rate multiplied by the number of hours worked.
Contractor: Ok, that seems a straightforward calculation.
Umbrella Company: Now, the expenses element is £50 so the government won't pay you that £50 but they will allow you to get tax relief on it.
Contractor: Ok, I see. I don't actually get paid for my expenses in cash, but I do get tax relief on the expenses amount.
Umbrella Company: That's right. So that means when we come to do your tax calculation, we only work out the tax on £450 (and not your earnings of £500) so the £50 that you've spent on expenses are taken off your income before your tax bill is worked out.
So you're not paying tax on the expenses (£50 in this example) and we add those back in at the end so, therefore, the expenses have escaped the tax calculation.
Contractor: Ok. What happens if I don't spend £50 on expenses? Some weeks it may be more and other weeks less than £50?
Umbrella Company: Well, that was purely just an illustration, what we would ask you to do is to let us know each week what business expenses you have actually incurred.
To do this we would give you access to your own account through our website portal and you can log onto that account at any time. If there's anything you don't understand or have a general query our expenses team is on hand talk you through and answer your questions.
Contractor: Right, so each week all I do is send you my timesheet and let you know what expenses I've incurred?
Umbrella Company: That's all there is to it. It's an easy process. We even set you up with templates to make things as simple as possible.
Contractor: Yes, it does seem a very simple process.
Umbrella Company: It would be very easy for to you let us know what mileage you've done, plus any other expenses, which again you could talk you through with us, which gives us a total of what your expenses are.
Then, when our payroll department processes your pay we'd make sure that the expenses amount escapes the tax calculation. It's a fluid process whereby you let us know your expenses and we make sure we reduce your tax, accordingly.
Contractor: Ok. That sounds fair.
Umbrella Company: What we also do, which is important, is that we cover you with the insurances that you need to work.
Contractor: It's great to hear that's all included in the service.
Umbrella Company: That's correct, it's all included in our fee. You require public liability and professional indemnity insurance, as a minimum.
We'll cover you with those because, as I said, you're seen as an employee of the umbrella company for the duration of the contract so you're covered by our insurances and then what we'll also do is give you personal accident cover and employers liability insurance.
So essentially, we'll
We do charge a fee for our service and that fee is just £x a week.
Contractor: That all seems very reasonable and really there's hardly anything for me to do, which is the best bit!
Umbrella Company: One other thing, you also get tax relief on our processing fee, so in real terms our gross fee of [say] £30 is actually nearer £22 or £17, depending on what rate of tax you pay.
Contractor: Even better!
Umbrella Company: What I could do is send you an illustration of the pay. I just need to ask you a few questions about your contract and what you think your likely expenses might be. Then I can send you an example of what your likely net pay would be.
ABC Umbrella Company: Perfect. Ok. That's all my questions and you've given me as much information as I need. What I'm going to do now is email you a one page illustration. It's like a dummy pay slip and will show your gross pay, the tax deductions and most importantly your likely take home pay based on the expenses as we've just talked about.
I'll also include what we call an employee information form. This is essentially a joining form. If you're happy with that and you'd like to use our services, all I need in the first instance is for you to fill that in and send it back to me.
That then will give me the information to contact your recruitment agency and request the paperwork to be set up between your agency and us so that we can set you on our system. Then you'll immediately have limited company status.
If you do decide to use our umbrella company service, then I'll send you an email to confirm receipt and let you know what's going to happen next. But also, similarly, if you've got any questions please feel free to ask me anything that is not clear.
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It's the basics... Compliance with Tax, VAT, PAYE and fiscal arrangements is mandatory for contractors regardless of whether you use an umbrella company or your own limited company.
Incredible then that there are still rogue umbrella companies and limited company accountants who expose their contractors to fraud. Umbrella Compare provides THE solution, we thoroughly vet all umbrella companies and limited company accountants that we list [Read more...].
Umbrella Compare provides a holistic overview of contracting with the aim of helping new and old contractors find the right payroll solutions. Contracting should be about focusing on the contract, not payroll, accounting, HMRC and bureaucracy.