An umbrella company is a professional employment organisation that engages contractors with a view to carry out multiple assignments at a series of temporary workplaces for various recruitment firms or end-hirers.
When you join, you become an employee of the umbrella company and receive all the statutory rights that go along with normal employment.
A compliant umbrella employment contract will always contain a guaranteed minimum hours of work per annum, which means a mutual obligation to work together to the benefit of each other.
The umbrella company enters into a contract with an agency or an end hirer for your services. You submit your authorised timesheets to the umbrella company who will in turn invoice the agency or end hirer for the work that you have carried out.
The agency or end hirer pays the umbrella company what is known as the contract rate or assignment rate. The contract rate covers the charges for your services as well as the costs related to your employment, such as employer’s NIC, holiday pay and other statutory costs.
The contract rate paid to the umbrella company is therefore higher than you would expect to get if you were being paid by the agency directly to account for the additional employment costs.
The umbrella company will pay you a minimum of National Minimum/Living Wage for the hours you have worked. Dependent upon the agreed contract rate with the agency, any amount over and above the NMW/NLW will be paid to you as a combination of any allowable business expenses and bonus related pay (less any statutory deductions for PAYE and National Insurance).
The umbrella company signs a contract with your agency (or end client when no agency is involved).
The agency pays the umbrella company a rate – known as the assignment or contract rate. This amount covers the work you have carried out, plus the costs related to your employment, such as employer’s NIC, holiday pay and other statutory costs.
This rate should always be higher than you would expect to get if you were paid directly by the agency/end client, to allow for these additional costs.
The agency pays the umbrella company the same contract rate they offer to a contractor working through their own limited company.
The Umbrella Company option provides you with legal status of an employee and handles the legal, insurance, administration, payroll and HR on your behalf. It’s a simple solution, with no unplanned tax bills and a straightforward process for claiming any allowable business expenses.
As an employee of the Umbrella Company, you will have access to a guaranteed number of hours work per annum and also be entitled to other statutory rights, such as holiday pay, sick pay, a state pension and maternity/paternity pay.
Using a reputable and compliant Umbrella Company provides a safe and compliant alternative to working directly through your agency.
The Umbrella PAYE option is most suited to you if you:
- intend to contract for the short to medium term
- want to trial contracting before making a decision to contract longer term
- want the flexibility of the contracting with the security and benefits of regular employment
- earn a rate of pay that can make working through an Umbrella preferable
- prefer a lower level of administration and responsibility than running your own Limited Company
- work on contracts that are inside IR35 or want to avoid the IR35 debate
Aside from normal employer/employee checks during on-boarding, such as verifying your personal details and Right to Work, you will have to submit your timesheets and any allowable business expenses with supporting evidence to the umbrella company within a certain time frame for processing.
Expenses must be ‘wholly, exclusively, and necessarily’ incurred in the performance of your employment duties. They must be genuinely incurred, reasonable and allowable under HMRC’s rules.
Examples of allowable business expenses include site to site mileage and work related training.
You should refer to the Umbrella Company’s expenses policy for guidance.
If you source a contract with the help of an Agency, some recruitment firms offer to pay you through their own payroll as an Agency PAYE worker.
Agencies will generally offer you a lower rate than what they’ll offer to an Umbrella Company or when you work through your own Limited Company. The reason is that aside from the administration costs of running a payroll, Agencies have to account for employers NICs, holiday pay and other statutory benefits, on top of what they pay you. They’ll often therefore pass on these cost savings in an uplifted rate if you work through a third party such as an Umbrella company or your own Limited Company.
There are few instances when travel and subsistence expenses claims will be allowable using the Agency PAYE option. This is because HMRC consider each assignment to be a permanent engagement. Ordinary commuting costs to a permanent place of work do not qualify for travel and subsistence claims.
Choosing the Agency’s PAYE option means you only deal with one organisation, and it is, therefore, a straightforward option.
Of all the ways of operating, the Agency PAYE option involves the least administration, but generally the lowest return on your income.
The Agency PAYE option is most suited to you if you:
- only intend to contract for a very short period
- don’t have travel or subsistence expenses
- want low administration or don’t want to involve a third party
- earn at a rate of pay (usually £10.00 per hour or less) that does not justify the margin of working through an Umbrella or the accountancy fees your own Limited Company
Construction Industry Scheme (CIS) is a tax deduction scheme affecting self-employed workers contracting in the construction sector.
The aim of the scheme is to reduce levels of fraud and tax evasion in the industry, as well as to help subcontractors to spread their tax liabilities over the financial year.
These deductions count as advanced payments toward the subcontractor’s tax and National Insurance.
In some ways, it is similar to the PAYE system for employees, in the sense that it requires contractors to withhold either 20% or 30% of the subcontractor’s payments and then pay this deduction to HMRC.
Both contractors and subcontractors are affected by CIS, with each having different responsibilities.
A contractor must register for the scheme.
A subcontractor doesn’t have to register, however, in not doing so, deductions are still taken from their payments, but at the higher rate.
If you’re not sure which category you fall under:
A contractor:
- pays subcontractors for construction work.
- might not have a business that carries out construction work, but has spent more than £3m on construction in the 12 months since you made your first payment.
A sub-contractor:
- Carries out construction work for a contractor.
- If you are a subcontractor and you’re also a sole trader, the owner of a limited company or a partner in a partnership or trust, then you will have to register.
- It’s worth noting that it is possible to fall under both categories, in which case you’ll need to register as both.
As a contractor, you will need to ensure that you register for CIS before you take on your first subcontractor.
Other responsibilities include:
- Checking that you should definitely be subcontracting the work to the worker instead of employing them. You’ll need to work out the employment status for an employee, which you can check on GOV.UK (you could end up with a penalty charge if you hire them as a subcontractor if they should be an employee).
- Check whether or not your subcontractor is CIS registered.
- Deduct either 20% or 30% from the subcontractor’s payments and pay to HMRC.
- File monthly returns and keep full CIS records – if you fail to do this then you may receive a penalty.
- Keep HMRC up-to-date with any changes to your business.
The CIS covers most construction work that involves a permanent or temporary building or structure, as well as civil engineering work, such as roads and bridges.
Other examples include:
- Prepping the site for work and cleaning the inside of a building after work has been completed
- Repairs/alterations
- Decorating
- Installing systems for: heating, lighting, power, water and ventilation
- Demolition
There are certain situations where it may be a bit confusing as to whether your work counts as being part of construction or not.
You won’t need to register for CIS if you:
- Carry out work in architecture or surveying
- Fit carpets
Make materials used in construction and deliver said materials - Hire out scaffolding (with no labour)
- Work on a construction site, but it has nothing to do with construction (such as running site facilities)
Supervision refers to whether or not the work a contractor is carrying out is being supervised by another person within a business, to ensure that work is being done and to the correct standard, this would be within ‘supervision’ guidelines. This can also include supporting the contractor when necessary to develop the skills and knowledge required for the assignment.
Direction will see a contractor being instructed, guided or advised on how to carry out that work at hand by another person. This will include a person coordinating the work to be carried out by a contractor as it is undertaken.
Control is when a person is dictating how the work should be done, as opposed to letting the contractor carry out the work how they wish to. Control can also refer to the power to move a person from one job to another.