Trading Method - Umbrella Company
Umbrella Company
With an Umbrella Company you become an employee of the Umbrella. As you are not a director of your own personal service company you do not need to worry about the liabilities associated with assuming the role of a director.
After securing a contract, the Umbrella Company will enter into a contract for your services with the end client. You do not sign the contract yourself, instead there will be a contract in place between you and the Umbrella Company.
The Umbrella Company will raise and issue invoices on your behalf, collect payments on your behalf from the client or agent, calculate tax and National Insurance Contributions (NIC) due on this amount, and then pay your net pay direct to your personal bank account.
Expenses
When operating through an Umbrella scheme certain expenses can be claimed before taxes are applied; this reduces your overall tax burden. These expenses must, however, be incurred wholly, necessarily and exclusively in the performance of your services in order to be allowable.
Many Umbrella providers offer what is known as a dispensation. This means that HMRC has allowed for expenses to be claimed up to a specific value without the need for P11d forms to be completed. Common items that are claimed include travel, subsistence and accommodation if working away from home.
IR35
As all of your income is subject to PAYE and NIC, you are operating within the scope of the IR35 regulations. Please refer to the IR35 Fact Sheet for more information. An Umbrella Company therefore removes the risk of any potential liabilities from HMRC under this legislation.
Why Umbrella?
Setting up and running a personal service company can be the most tax efficient way of working and has a number of advantages. For example:-
- You can claim back a wider range of expenses, including accountancy fees and equipment costs.
- You have complete control over your financial affairs.
However, running your own company means additional burdens in terms of compliance, liabilities and administration. If an individual you may prefer not to get involved in the increased paperwork and tax compliance due to time constraints, a lack of knowledge in these areas or simply due to the desire to ensure that your free time remains leisure time.
For others, the appeal of an Umbrella may lie in the fact that they only operate under a series of short term contracts when work becomes available and an Umbrella set up allows for quick set up or termination without additional cost.
Alternatively, your charge rate may show that it is not cost effective to run a Personal Service Company and again, an Umbrella may be more appropriate.
Finally, you may simply be attracted by the lower fees associated with Umbrella schemes as opposed to those of accountants or book-keepers that would be required if you were operating a limited company.
An Umbrella Company may, as a result, be a more appropriate and cost efficient method of trading for such individuals.