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What is a PAYE Umbrella Company? Choosing the right one for contracting

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Contractors normally use 2 trading methods for contracting.

One of them is, contracting through the Limited Company method, and the other one is through an Umbrella Company.

In this article, we’re going to focus on the umbrella company option and not the limited company one.

So, what is an umbrella company?

In simple words, Umbrella Company is a company that acts as an intermediary between agency and contractors. More than an intermediary, they act as an employer to contractors who work on temporary assignments.

Umbrella Company will bill recruitment agencies (who will then bill the end client) for the work done by contractors. Umbrella Company will then pay the contractor their salary (or do the payroll) through PAYE (Pay As You Earn) after offsetting some of their income by claiming allowable expenses like meals, accommodation and transport.

As a Contractor, why should I use an Umbrella Company?

Well, the answer is very simple. You would choose umbrella company route over limited company one because:

- You don’t want to get involved in the hassle of setting up and managing a limited company

- You want quick and easy setup

- You don’t want to get involved in matters like company tax, self-assessment, expenses, taxation, payroll etc.

- You don’t want to take the risk of IR35 and HMRC investigation

How do I know which Umbrella Company is ideal for contracting?

Now, that’s a good question. This can be a bit tricky if you end up in the hands of a wrong one. At the end of the day, all your hard earned money goes to them before it comes to you. So, it definitely needs to be a ‘Safe’ umbrella company (not literally though).

There are a couple of things one needs to bear in mind before opting for an umbrella company. 

- Time and speed are of essence. You need to find out how quickly they will submit invoice to the agency, once you submit them your timesheet

- When you will get the money

Since they act as your employer, they would probably hold up a certain proportion of your income, which would be paid out to you at a later date. You need to clarify what proportion that will be and when exactly you will get paid

There are agencies who have a certain list of umbrella companies. Agencies call it as their PSL (Preferred Suppliers List). It contains a list of umbrella companies whom they trust and they might refer it to you as well before you start your contract.

We are not sure how reliable it is. Because, many umbrella companies pay an ‘x’ amount to enter into recruitment agencies so called PSL. Be careful, as this could ultimately land you into trouble. Do proper research. You could probably ask your agency, why they are recommending that particular umbrella company.

One important thing you need to ask your umbrella company, and that is the cost they will charge you for acting as your umbrella company. They normally charge anywhere between £20 to £35 per week, depending on the service they provide and the umbrella company.

In the end, you could also take some references, ask some fellow contractors or you could also ask us, and we will do our best to help you choosing the right umbrella company. 

Feel free to email us on contractorumbrella@contractordaily.com  OR visit ContractorUmbrella UK if you have any queries related to Contractor Umbrella Company.

Source: Self

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Smit Shah

Smit is the Owner of ITContractorsuk.com, an avid blogger and likes to write about Contracting, SEO and Social Media.

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