The Umbrella Company Guide

One of the first decisions a contractor needs to make when starting out is whether to finance their company through a Limited Company or work under an umbrella company. Umbrella companies fill an important role in the contracting sector and every contractor should be familiar with how they operate before deciding how to organise their earnings. Umbrella companies operate as intermediaries between contractor and client (either as agencies or employers) and allow contractors to work contracts as a freelancer but still be classified as an employee under PAYE. This offers the advantages of the flexibility of contracting with few of the disadvantages as your umbrella company takes care of all of the paperwork and back office administration on your behalf. All you have to do is fill out a timesheet once a week.

However, there are disadvantages too and the pros and cons of umbrella companies versus limited companies is something contractors need to explore. Here at contractor guides we cover every aspect of that decision, from the tax advantages that many umbrella companies offer (and in some cases only claim to offer) to what they provide in terms of expenses claims and backroom support. If you do decide to go down the umbrella company route, we offer guides and comparisons to what each company does and feedback on those companies from other contractors, as well as a guide to how much you should be paying.

Reasons to use a PAYE Umbrella solution

  • They’re designed to remove the administrative hassle of running a limited company
  • They’re extremely beneficial for short-term contractors as all the costs involved in the set up and running of limited company have been removed
  • You don’t need an accountant or a bookkeeper to be involved as its not necessarily to have company accounts, directors responsibilities or complete VAT returns.

All this freedom and lack administration does come at a cost, nearly all umbrellas will charge weekly or monthly fees (you can claim this cost back in expenses) and in some cases your net return in slightly lower when compared to a limited or offshore solution.

Another outside benefit of using an umbrella is that you become a full employee and you gain all the employment rights and benefits that you’d expect from a permanent position, like holiday pay and in some cases.
If you talk with a provider that doesn’t offer you full employment status, this is a warning sign and they may not be HMRC compliant, it could be a good idea to keep looking

CHECKLIST FOR NEW PROVIDERS


This short checklist is a list of some of the questions that you need to ask when speaking to a new contractor umbrella provider

  • The year the company was started?
  • Number of contractors they currently have employed?
  • How often they make payment runs?
  • How quickly they produce invoices after they received the timesheets?
  • How quickly they pay you after receiving timesheets?
  • Is there a minimum period you have to be employed by them?
  • Do they offer guarantees on service or money back?
  • What insurances are included?
  • What recruitment agencies do they work with? (is yours included?)
  • What are the fees to be part of the umbrella?
  • Is there a fee for same-day payments?
  • What is the expected income retention rate?
  • Have they been audited? If so, by who and when?

DIFFERENT TYPES OF UMBRELLA SCHEMES


PAYE Employment

This is one of the most common structures; it offers Contractors a PAYE solution so you’re fully employed by the umbrella company when you are active in a contract.

The Swedish Derogation Model

This model was introduced in response to the recent agency workers regulations (AWR). The Swedish Derogation Model is a little difference compared to traditional PAYE umbrella as contractors are paid a regular salary wither they are in contract or not and will have full employment rights in regards to statutory payments which include sickness and maternity and paternity adoption and holidays and in some cases pensions.

Offshore umbrellas

While these are not what you’d consider traditional umbrella companies they do offer a variety of tax solutions for contractors and freelancers for more information on offshore umbrellas please click here.

GENERAL STEPS TO JOIN A NEW UMBRELLA PROVIDER


The process to join different providers will vary but as a general guide these steps will help you to make sure that you are up and running with a new provider quickly. Normally you can be signup and ready to submit timesheets within 24-hour’s, subject to some internal checks that the new company must do.

  • Let your recruitment agency or client know of the change
  • Send your contract to new umbrella company
  • Fill in and sign all application forms and documents the new provider requires
  • Send in P45 from last employer
  • Sign contract with new provider

Video – What to look for in an Umbrella Company

HOW YOU MOVE FROM A LIMITED COMPANY TO AN UMBRELLA COMPANY

Umbrella company offers a perfect solution for majority of contractors. Precisely, it is the best option for contractors who are only looking to try contracting without committing to responsibilities of a limited company. However, if you have already chosen a limited company and you feel stuck with your choice, you can still move from a limited company to an umbrella company to an umbrella company without sacrificing much. All you have to do is to follow instructions laid down below. These will help you to make this move easy and quick without any legal complications.

WHY YOU WOULD WANT TO MOVE?

  • Before we go ahead and discuss moving from limited to umbrella company, it would be ideal to discuss different reasons that may trigger this move.
  • You don’t have to keep an accountant when you are working through a contractor umbrella company.
  • You don’t have to worry about communicating with HMRC or Companies House. Umbrella company would do this for you.
  • No legal accounting and taxation issues.
  • You can accept a contract outside of the UK when you are working through a contractor umbrella company.
  • If you think these factors can motivate you and your work efficiency will improve, you should make a move.

WHAT TO DO WITH YOUR LIMITED COMPANY?

Although it seems a straightforward procedure to move from limited company to a contractor umbrella, it is not that way practically since a company is a legal person and new rights and duties are created when a company is incorporated. If you are done with the company, you can’t leave it like that. You will have to change its legal status so that you are not liable for anything related to the company. You can do two things with your existing limited company.

    • Close the company
    • Keep the company but turn it into a dormant company
        We will discuss both the options in detail so that you can pick the one that suits your requirements and circumstances.

CLOSING DOWN A LIMITED COMPANY

Closing down a limited company is a lengthy procedure that involves various legalities. So before you close down your company, make sure that you won’t need it again. If you sense that your circumstances may change and you may need the company again, then skip this section and move to next one where we will discuss how to make a company dormant. If you are sure you want to close your company, then follow the steps below. Step 1: Choose voluntary striking off if your company doesn’t have any financial issues which are causing the company to close down. If it is facing financial problems, then you should consult your financial advisor and work closely with him/her to avoid any further problems. Step 2: Assuming that your company doesn’t have any financial problems and you can choose voluntary striking off, you should start closing down the company by clearing your financial liabilities by paying off its invoices. Step 3: Inform HMRC, company’s bank, and company’s insurer. Send final tax returns and accounts to HMRC. Step 4: Apply for closing down the company by applying with Companies House. You will be required to submit Form 652a in order to initiate the procedure. The Registrar at the Companies House will announce and advertise closing of the company.

KEEP THE COMPANY DORMANT

If you have decided to keep the company dormant instead of closing it, you simply need to prepare trading accounts for as the accounting period. Once the new accounting period has started, you can cease company operations by ceasing to do business through your company. You don’t have to release any notification or inform HMRC. All you have to do is to stop doing any business through your company.

CHOOSING AN UMBRELLA COMPANY AFTER CLOSING DOWN LIMITED COMPANY

When you have finally closed down your limited company or you have made it dormant, you can choose an umbrella company to work with. Ideally, you should read some reviews and ask other contractors for suggestions before looking at different contractor umbrellas. Just be sure that the umbrella of your choice provides features that you need at affordable cost.

TOP TIPS FOR CHOOSING AN UMBRELLA COMPANY

If you are just starting as a contractor and you have started looking at different contractor umbrella providers, you may not have time to think about the best one out there. There are hundreds of companies out there and majority of them provide almost all the features that can invoke your fancy as a contractor. You will see some of them going even further and offering all the standard umbrella services at incredibly low rates. Some of them may actually charge more money than they advertise through various sorts of hidden fees but some of them will actually provide services at the fee that was originally advertised. So you wonder where to go from here. Whether to choose an umbrella that is dirt cheap or go for an umbrella solution that offers the best value through its umbrella and accounting services bundled together. The decision may prove to be tough but remember it’s the most important decision you will ever make as a contractor. Selecting the right umbrella company provider will ensure that you can focus on your work and grow as a contractor instead of getting tied to everyday problems such as HMRC compliance, payroll, and tax returns. One of the best ways to figure out something from this situation is to understand what YOU need and for a little while forget about what umbrella providers are offering. Do you need someone to manage your payroll? Do you want to forget about HMRC compliance and let someone take care of it? Do you need financial advice or you think you can do it yourself? Once you have figured out what you need, you will pretty much have everything in front of you. You can then go out there and search for umbrella providers that provide a solution that’s focused on your requirements. You can filter all the potential providers by cost of services, additional features, and overall value that is being offered by different providers. The best way to find the right umbrella company provider is to do your research. Figure out the REAL value offered by different companies. Once you do that, you will be in a better position to judge. These tips below can help you increase the pace of your research. Make sure that you are not falling into the ‘fee’ trap. Some umbrella companies will charge you for joining and even for leaving the umbrella provider. This is insane considering that even the best providers out there aren’t charging anything in lieu of entry and exit fee. So if you come across any provider who wants your money when you decide to leave the company, steer clear of it.

        • Some umbrella providers are going to be even clever than that – they will simply link their fee with your earning rate which means you will have to pay them more when you earn more. This again makes no sense. Since the services will remain essentially the same, there is no reason to charge additional if you are making more money. You should avoid such providers and only look for providers that offer fixed fee irrespective of your earning.
        • Although now becoming rare, some umbrella companies will tell you that you can increase your take home pay by claiming expenses (which is true) but they will want you to claim expenses without receipts (which is a huge mistake). This can result in massive problems during an HMRC investigation. So make sure that you are not adding any such companies to your short-list.
        • Choose a company that has already built its repute. If you are going for a new company that is still to prove its value, you are risking a lot of things. You should read reviews from other contractors to be sure that the company of your choice already has happy clients.
        • Go for umbrella companies which are fully automated and offer all the services through an online portal. You shouldn’t be filling paper sheets or calling the company for any information you need about your tax returns. Ideally, all this should be online and accessible 24/7 through the internet. Since majority of umbrella providers are now using fully automated online system, you won’t have much trouble finding a top provider that offers an easy online portal for access to your payroll, tax information, and other services.

Video – How does an Umbrella Company Work

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