How does a PAYE umbrella company work?
Hi, my names Alex and I work for Danbro – Contractor Accoutants, as part of the marketing team. In this article I will be discussing what and how a PAYE Umbrella Company works. Looking at the advantages & disadvantages of using one and how to go about getting one set up.
A PAYE umbrella company service is commonly used by contractors as a more tax efficient & hassle free way of handling their earnings. With a PAYE Umbrella Company you become an employee of the chosen umbrella company. Then each month you simply instruct the umbrella company to invoice your agency via time sheets that are usually submitted online.
An umbrella company will assess your IR35 status and offer you advice on how to operate tax efficiently. For instance if you are outside IR35 it will give you the opportunity to go down the limited company route for contracting, meaning the umbrella company will create a limited company in your name, pay you a minimum salary and then the rest via dividends; significantly decreasing the amount of tax you are hampered with.
The Key points
Contractors become employees of an umbrella company.
Each week or month the contractor instructs them to invoice the agency/client based on their time sheet.
The umbrella company then pays the contractor a net salary after deducting national insurance contributions and income tax on their earnings.
After securing a contract you instruct your agent to send a contract to the umbrella company for signing.
Expenses like travel, computer costs, training etc, can all be claimed when working under an umbrella company.
There will be a separate contract in place between you and the umbrella company.
Why use an umbrella company
There are many factors contractors should take into account before setting up an umbrella company. The main one being financial considerations; is this the most tax efficient way to operate? How will your IR35 status affect your earnings? Depending on the value of your contract there may be a better way to operate such as setting up a limited company. As always I would recommend contacting a contractor accountant that handles many solutions, then they will be able to tailor you a solution to suit your needs. Most good contractor accountants will provide this consultation for free, and provide you with a good idea of how much money you can take home on their service. Most umbrella companies will also provide an Umbrella Company Calculator via their website to provide an estimate of the amount a contractor can earn taking into account their wage and expenses etc.
For further details, please contact Danbro on: 01253 600141,
General Enquiries: 01253 600140,
London Office: 020 7836 8400 or
E-Mail: enquiries@danbro.co.uk
Danbro is a firm of award winning Chartered Management Accountants, providing specialist accountancy and payroll services to contractors and freelancers throughout the UK.