When you are an entrepreneur, you may be regularly asked how you are going to provide your services to your clients. This means whether you are going to contract through a PAYE agency, through your own shareholding company, or through an umbrella company. To be able to make an informed decision, you need to understand each of the options available to you, as well as the pros and cons of each option. Although many people know very well what a limited liability company is, the question that comes up regularly is “What is an umbrella company?”.
In this article, we will explain in detail what an umbrella company is and how it works, as well as compare and contrast some of the different options for providing your contracted services.
What is an umbrella business
Let’s start by answering the question “what is an umbrella company?”.
The umbrella company acts as an intermediary between the entrepreneur and the end consumer or agency. The umbrella company hires fixed-term service providers who take care of billing, income tax, and social security contributions. The contractor pays the umbrella company monthly for their services in exchange for handling your bills, income tax, and national insurance contributions on your behalf. So, instead of being self-employed and dealing with your own corporate director, you are treated like an employee of an umbrella company that works with that director on your behalf.
What do umbrella companies do?
Umbrella companies allow entrepreneurs to work as employees rather than freelancers. This is because they take care of the administration that you would normally have to do if you were self-employed, such as billing and paying income tax and national insurance contributions. Let’s see how exactly an umbrella company works.
1. Contracts signed
The process begins with the signing of contracts by all parties. The umbrella company and the recruiting agency or end customer will first sign a contract to agree on the contract rate and how it will be paid. Then you sign an employment contract with an umbrella company to become an employee of the company. This means they can pay you directly as an employee and manage your income tax and national insurance contributions.
2. Submit timesheets
If you have worked as a contract freelancer or limited liability company, you will need to provide invoices to the client for any work performed. When you work for an umbrella company, you send timesheets to the company instead. They will then bill the end client or agency on your behalf for the hours you have worked, plus any charges you may have to claim.
3. Receive payment
The end client or recruitment agency will then send the payment to the umbrella company, which will calculate your income tax and national insurance contributions and deduct them from your total salary. They will also deduct fees for managing your account. Finally, you will receive money directly into your bank account. You will also receive a payslip detailing your income tax, national insurance and management fees, and any pension contributions.
How do umbrella companies make money?
You might be wondering exactly how an umbrella company makes money, given that it acts as an intermediary between the end consumer and you as the contractor.
The umbrella company gets paid for its work by charging the contractor. These costs are deducted from wages paid by the end user or agency before tax. This means that you will recoup some of the costs by paying less tax.
Most umbrella companies charge a flat fee per month. However, some umbrella companies charge based on a percentage of your earnings, so it’s worth checking this out before signing a contract.
What is better PAYE or umbrella company?
While many contractors work on a one-to-one basis or through a limited liability company, this option is not suitable for everyone. For those who prefer someone else to handle their income tax and national insurance contributions, they are usually left with two options: a PAYE agency or an umbrella company. But what are the pros and cons of each option and which one is right for you?
There are several different factors that you need to weigh when choosing between a PAYE agency and an umbrella company. Let’s look at some of these factors.
It is important to consider costs when choosing between a PAYE agency and using an umbrella company. In the end, all fees will be deducted from your total income, which will reduce your wages.
As a rule, working with a PAYE agency is free. However, umbrella companies charge fees for using their services, which makes this option more expensive. Some staffing agencies offer a higher contract rate to those who choose to use an umbrella company due to reduced business administration. For this reason, before making a final decision on which option will offer a higher salary, it is worth calculating your salary with both options.
Whether you choose to work through a PAYE agency or through an umbrella company, you will become an employee of the company that pays your salary. Whichever company you choose, they will be responsible for your administration and payroll, making your job easier.
When you work for a PAYE agency, you will be hired by another company for every contract you accept. However, when you use an umbrella company, they will handle each contract, which means you only work for one company. This continuity can be helpful when it comes to applying for a mortgage or loan.
Whichever option you choose, you will be entitled to legal employment rights such as sick pay and retirement plans. This gives you an advantage over working as a sole trader or through a limited liability company because being self-employed does not give you the same rights to work.
When you’re deciding between agency PAYE and an umbrella company, you might be concerned about insurance requirements. Do the requirements differ between agency PAYE and an umbrella company, or are they the same?
Whether you choose to work through agency PAYE or an umbrella company, you’re likely to need to take out insurance. Depending on your job role, this is likely to include public liability insurance and professional indemnity insurance. However, you might find that some agencies or umbrella companies provide insurance on your behalf, but you’ll need to check this to ensure that you’re covered.
IR35 is an unpaid work rule that was updated to include the private sector in April 2021. This means that it is now important that you are aware of these rules and how you can stay on the right side of the law when it comes to IR35.
This law aims to prevent employees who should be considered employees from offering their services through a joint stock company or as a sole trader. Because those who work through umbrella companies or a PAYE agency are not self-employed, they are generally not covered by IR35 legislation. However, it’s always best to check to avoid any fines or lawsuits against you.
You may also be wondering if there is support for those working through a PAYE agency or an umbrella company. Unfortunately, this depends entirely on the company you work for or the umbrella company you choose to represent.
Whichever option you choose, you should have access to Human Resources for help, guidance, and professional advice. You can use this service for anything from notice to litigation to wrongful termination. However, the reliability and quality of the staffing support offered to you will depend on the company. Your best bet is to ask current employees of the agency or umbrella company for their opinion on the service, and also search the Internet for unbiased reviews.
Umbrella vs PAYE agency – which is right for you?
So we’ve discussed the pros and cons of working through both an umbrella company and a PAYE agency, but which option is right for your personal situation? Here is a summary of a variation that might work for you. However, it is still important to thoroughly research each option on your own before making your final decision.
Choose an umbrella company if you:
- Work simultaneously under several different contracts
- Want to enjoy the benefits and security associated with continuing to work
- Want to be able to claim travel and accommodation expenses
Choose a PAYE agency if you:
- Plan to sign a contract for a short time before returning to a full-time job
- Will only work for one company
- Want to avoid using of third party
How are umbrella companies legal?
Umbrella companies are perfectly legal. However, there may be some downsides to choosing to pay with this method, and it’s still important that you do your research before signing a contract.
Umbrella companies allow many workers to be paid by one employer, no matter how many different contracts they have. This gives them a better chance of getting a mortgage or loan, and also simplifies the administrative requirements for the worker.
However, umbrella companies are not regulated. For this reason, there are unethical umbrella companies that exploit workers and make unnecessary payroll deductions, leaving workers worse off than if they chose to pay through a PAYE agency.
For this reason, it is important to be selective when choosing an umbrella company and be sure to read reviews carefully before making a decision. This will help you avoid unethical companies and find one that suits your needs.
Are umbrella companies bad?
Umbrella companies are not inherently bad. However, it is important to note that umbrella companies are not regulated, which means that there will be some unethical companies that you need to be careful with. It is imperative that you do your research before signing up with an umbrella company to make sure you are not hit by high fees and bad terms.
Can an agency force me to use their umbrella company?
It is illegal for an agency to force an employee to use their umbrella company for payment. It is imperative that any entrepreneur do their research before making a choice between a PAYE agency and an umbrella company, and before deciding to sign a contract with an umbrella company. While there are many ethical umbrella companies, the market is not regulated, which means that there are also many umbrella companies that charge high fees and do not provide the level of security that entrepreneurs deserve.
Are you self-employed if you use an umbrella company?
An umbrella company is a business that hires contractors and manages their contracts with agencies and end customers on behalf of the contractor. So by joining a payroll transfer company, you are effectively becoming an employee and not a self-employed person. However, some individual contractors will choose to outsource only part of their contracts to an umbrella company, while retaining some contracts as an independent contractor. These entrepreneurs are both employees of the parent company and completely independent.
Is it worth working through the umbrella company?
There are both advantages and disadvantages to going through an umbrella company. While this can be an ideal solution for many employees, it can also be potentially problematic for other employees who might be better off choosing a PAYE agency.
In this article, we have answered the question “what is an umbrella company” as well as some key differences between working through an umbrella company and a PAYE agency. Whichever option you choose, it’s important to research it carefully, calculate salary potential, and read unbiased reviews of the company you’ve chosen to make sure you get the best deal.