Umbrella Contracting -How dose an Umbrella company Work

Posted by Rosie jack on February 26th, 2021

When it comes to using an umbrella business, Umbrella Contracting can seem stressful. To explain how an umbrella company works for contractors, we have put together a quick guide. Both compliant umbrella agencies run PAYE to ensure that the tax responsibilities of the contractor are fulfilled by determining the correct tax and NI that is charged to the HMRC to ensure that their profits are paid after weekly or monthly contributions. The payment frequency depends on the terms of the contract and when obtaining a new contract, it is a good idea to negotiate this with the recruiting agent or end user.

We have provided a simple diagram below that most clearly demonstrates the entire operation. When you join an umbrella organization as a contractor, according to the cut-offs, the only obligation will be to make sure you send your time sheets. Many umbrella organizations have invested in the latest technologies and have online platforms that ease the process by uploading time sheets and giving you access to your history of jobs.

What's involved in umbrella contracting?

In the umbrella company process, there are three parties. Above the Umbrella, you will see the client, who may be the recruiting firm or the end user, and the contractor, eventually.

When entering an umbrella organization, all contractors become employees of the umbrella company UK. The worker then works on customer tasks that they source and apply their timesheets to get paid for. The Umbrella takes care of all back-end jobs, such as raising invoices to pursue payments and ensuring that all taxes and NI are paid to the HMRC, most notably.

How to make sure you use a compliant umbrella company?

When entering a new umbrella payroll service, you must check your pay slip to ensure that there are no payments listed as a loan or expenditures that have not occurred, as uncompliant umbrella businesses use these as tax avoidance strategies. We had vendors contacting us who were approached months or years later by the HMRC pursuing extra tax payments. Many of these non-compliant umbrella firms offer a deceptive 90% take-home pay, since they do not comply with UK tax laws.

Claims made by organizations that are not compliant:

• A strong take-home pay, e.g. "90% take-home pay"
• Specifying that they have clear agreements with HMRC.
• Low fees which, over time, increase.

Ask for a premium service to set up fees, which helps you to raise your take-home.

Non-Complaint Umbrella Organizations have been on the HMRC radar and have recently published them on their spotlight extension that offers information on fraudulent and non-compliant business operations.

Smart Choice provides a free online portal for all contractors and charges very low fees. We ensure that all of your tax responsibilities are fulfilled and paid to HMRC. To see if we can help, get in touch?

We hope you get a clear understanding of the method from the guide we have put together. We have worked hard to make the process as easy as possible. Contracting might not be everybody's cup of tea. To support and base our company values on compliance, we are always on hand. We are on hand to give free advice if you have any questions.

We will support contractors who are facing changes in the IR35 regulations and provide a rigorous mechanism to ensure that all specifications are met. If you are not sure how IR35 will impact you, we will very soon be publishing an IR35 Guide for changes from April 2021. You can also call us and talk to our dedicated IR35 advisors free of charge to work out how you will be impacted by the regulation charges.