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An umbrella company acts as an employer to independent contractors, usually those on short-term contracts or those individuals who do not want the added workload and responsibility of running their own Limited Company.
Umbrella’s act as an intermediary between a contractor and the client with their principal responsibility being to organise payment for work.
They provide ready made invoicing solutions removing the administrative burdens usually associated with contracting and are the main alternative to setting up your own limited company.
The Umbrella Company would normally issues invoices on the contractor’s behalf, collects payments from clients, calculates Tax and NI contributions and pay contractors their net pay direct to their personal bank account.
The difference between operating through a limited company or under an umbrella is employment status. Through a limited company, a director and can take advantage of a variety of methods for minimising tax, provided that they are willing to take full responsibility for their financial affairs.
With an umbrella company , individuals retain the flexibility that contracting offers whilst the bulk of the paperwork and back-office administration is carried out their behalf. However, as employees they are subject to PAYE and the associated National Insurance contributions.
The Umbrella method of working is very straightforward. Once a contract is agreed and your ‘Limited Company Rate’ (Ltd rates is inclusive of NIERS that the Umbrella has to pay to HMRC) established, the only requirement from the contractor is to submit a time sheet, normally online via the umbrella company web site. This is information is then used it to invoice the client.
Once the client has settled the invoice the umbrella company will forward payment to the contractor, less their fees and any tax or NI due. Contractors as employees of the umbrella company are issued a payslip giving full details of how their pay has been calculated.
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