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What is an umbrella company?

An umbrella company can help get our ducks in a row
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In some ways, you can think of an umbrella company as like a temp agency – they stand between you and the client and handle the admin and tax. But unlike a temp agency they don’t find you any work or offer you assignments – you still have to do that part on your own.

You get paid through the umbrella company under PAYE. They handle timesheets, invoicing, PAYE, VAT (if you are registered) etc for a fee. The umbrella company does all the company administration and tax administration. They handle workplace pension contributions, national insurance and more.

Umbrella companies can exist in addition to your own limited company, or in addition to your sole trader business. They cost money to own and run just like any company so you will need to take into account the costs involved (and adjust your rates) if you are being pushed to go down this route.

You can put all of your business through one umbrella company and not have your own limited company or sole trader business alongside. You should talk to your accountant before taking such a step since finishing an old business structure and starting another one, takes a bit more than simply deciding to do so. You can get the tax side of things very wrong and end up with some unexpected bills.

Why would invoice through an umbrella company?

If your contracts are legitimately outside IR35 then the only reason for taking on the costs of an umbrella company are that your client insists on working this way (and you don’t want to lose the client).

If you do choose to work this way you need to be fully aware of the costs involved since a good ‘outside IR35 rate’ goes down rapidly if the same rate is being charged through an umbrella company.

How umbrella companies work

  1. You pitch for the work, price it, get the client and the client agrees.
  2. Either you or the client proposes an umbrella company.
  3. You may have costed your pitch on the basis that you don’t have an umbrella company so you may want to review your rates to take into account the increased costs of an umbrella company, and the reduced cash flow.
  4. Your umbrella company signs a contract with your client. You will need to check out what this contract says and whether you can use your KoffeeKlatch terms of business. Most umbrella companies use one standard contract for all their clients. They are not interested in protecting your copyright or your IP or in securing a proper GDPR compliant way of working. You will need to read this carefully and compare it with your usual terms of business to see what rights your umbrella company is giving to your clients compared to what you normally do.
  5. You’ll also need to sign a contract with your umbrella. This may be a contract of employment. But just paying PAYE does not make you an employee. You need to read that carefully and see what rights and obligations are in it.
  6. Your timesheets go through your umbrella company, who invoices the client. You may not be able to control how quickly they issue invoices, or how effective their credit control process is. You will want to know the average days from invoice to cash.
  7. When your umbrella gets the payment, they’ll process your payroll. You’re paid a salary, which deducts income tax, National Insurance contributions, pension contributions. You will also have to pay their fee at some point.
  8. There is no guarantee the Umbrella company will get you paid in any particular timescale and you should carefully check both contracts to make sure you can stop work if the payment periods get too long, and that you can charge interest for late payment.
  9. You reclaim allowable expenses, which your umbrella should process too.
  10. Your umbrella gives you a payslip that shows your take-home pay as well as all the deductions which include employers and employees national insurance, pension contributions, any training levies, etc.

Pluses and minuses of an umbrella company

Plus

You will get access to statutory sick pay (and furlough schemes if we ever go that way again), maternity and paternity pay, reduced administration on pension administration.

You will get the right to statutory holiday – but of course, you will be paying it yourself out of the money your umbrella company gets from your end client (less their fees).

You send your timesheets to the Umbrella company that sends the invoices and timesheets to your end client and chase for payment.

So it is a bit like being an employee. You do the work, send the timesheets in and someone does the rest of it. If what really bothers you about self-employment is the admin, this may make sense for you. But so would taking on a good admin VA!

Minus

Umbrella companies cost money – which can be around £30 a week. Or over £1500 a year. Doing this for just one client will only make sense if you are charging them a great deal of money!

That comes off your gross revenue before you starting paying employers and employees national insurance as it goes into payroll.

Not all umbrella companies are compliant with current laws. Claims that you will be financially better off because of increased tax efficiency should be run past your accountant. There are some dodgy practitioners out there. There is a professional association for umbrella companies with a code of conduct, so a good start would be to check out if the one your client wants you to use is a member.

Freelancer & Contractor Services Association (FCSA) member

It’s not easy to decide what to do. For some contracts, the costs outweigh the value of the contract and the obvious answer is no thank you. If you pitched using a link to KoffeeKlatch terms of business, you can go back and say I’d love to, but it will cost extra (having worked out how much).

Sometimes that client is just too valuable to consider losing them. But you are going to want a lot more than ‘zero hours’ to justify the need – so at the very least you are going to want a minimum term in your contract with notice provisions. After all your client is getting rid of any tax liabilities they might have – and you need to be careful you are getting something in exchange.

If this is being driven by concerns about the new IR35 rules, you will want to be clear about what the real risks are. If you are using KoffeeKlatch terms of business, you will find a free mini IR35 programme in the KoffeeKlatch zone – designed to help you understand how this may work for you.

Be a a trader not a beggar. Remember business is all about negotiating and finding out what is best for you AND your client. Do not be hurried into making a decision you will regret.

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