Part One: Everything you need to know about umbrella companies

By Fay Capstick

One of the first questions that anyone new to contracting within our industry, IT & Digital Recruitment and Consulting, will have to answer is whether to use an umbrella company or have your own limited company.

This week and next week we will be focusing on umbrella companies, what they are and how they work, and weighing up the pros and cons of using them. Basically everything you ever wanted to know about umbrella companies will be covered.

What is a limited company and why would I want one?

Forming a limited company means that you are paid to your company by the agency or end client. You will be a director and shareholder of the legal entity. Any profits or losses to the limited company are yours. The business is liable for debts, but you are not personally liable.

Setting up a limited company will involve filing the appropriate forms with Companies House (www.gov.uk). You will then have an obligation to file accounting and other details at set times.

The advantage of a limited company is that you will take home more money. This is because your money can be in the form of both wages and dividends which have differing tax rates and allowances.

What is an umbrella company?

Umbrella companies have been in existence for a couple of decades. Previously contractors in our industry would have set up a limited company and worked through that, or been PAYE through a recruitment agency.

Having your own limited company involves regular accounting and admin work, something not everyone has the confidence to do. An alternative is to work through an umbrella company, or PAYE umbrella. The umbrella company is an entity that is stood between the contractor and the client, and technically you are working for the umbrella company as their employee.

It is estimated that currently 400,000 contractors and freelancers choose to have their fees put through umbrella companies.

How does it work, do umbrella companies pay your tax?

No, they do not hold onto your tax. Your tax is sent to HMRC directly. They also make any other necessary deductions on your behalf. This saves you all the admin that is involved in running a limited company.

What does it cost to use an umbrella company?

The umbrella company will make money from you by deducting a margin from your gross pay.

Each umbrella company will charge a different margin and you are therefore best advised to shop around to find a rate and company that best suits your needs. As a rough example you can expect to pay somewhere up to £25 a week.

Step by step how does it work?

1. Choose the umbrella company that you wish to use (make sure they are FCSA accredited).
2. Follow their registration procedure, either over the phone or online.
3. You will need documents to prove your identity and right to work in the UK.
4. When you sign the contract you become their employee.
5. At the end of each work week you will submit your hours worked, your timesheet, to the umbrella so they can work out what pay you are due.
6. They will invoice the agency that you are working through.
7. You will be paid.
8. Each year you will receive a P60.

Can I claim expenses?

Yes, in theory, as an employee of an umbrella company you will be able to claim expenses. It should be noted that these expenses are limited to be no more than what a permanent employee would be able to claim.

This has changed, as previously umbrella companies were able to let employees claim more expenses, excluding subsistence and meals. This change means that it is a factor to consider when deciding whether to use an umbrella company.

Conclusion

Next week we will look further into the advantages and disadvantages of umbrella companies and cover more of your pressing questions.

Final thoughts

At Parker Shaw we have been at the forefront of the sector we serve, IT & Digital Recruitment and Consulting, for over 30 years. We can advise you on all your hiring needs. If you are looking for your next job in the IT sector please check our Jobs Board for our current live vacancies at https://parkershaw.co.uk/jobs-board.