Umbrella Companies

PAYE umbrella companies

If you use a PAYE scheme all income after expenses is taxed as though you are an employee, similar to operating inside of IR35.

If you a high earner the use of an Umbrella company option would mean losing out on significant tax advantages compared with becoming a sole trader or running your own limited company. Expenses can be claimed through a PAYE umbrella company before taxes which helps to mitigate some of the tax burden.

The main Pros

• Low administration, possibly some receipt free expenses.
• Most Umbrella Companies provide Professional Indemnity, Public and employers liability.
  

The main Cons

• Low net return compared with other options. You will pay full PAYE taxes on all of your income, except for expenses.
• You aren’t given any real choices; Often it’s a case of one size fits all.

Overview

• Most umbrella companies charge reasonable fees, but do take care as some charge very high fees and even set minimum fee levels.
• Some umbrellas put your money aside to cover holiday and sickness. Always ensure you claim back all the money put aside.
• If you claim assets, such as a computer through an umbrella company they will legally own this item. What happens to your equipment if the umbrella goes into liquidation?
• Some umbrella companies can provide a HMRC ‘Dispensation agreement’. Please be advised that a dispensation is not a license to print money. The dispensation might say you can claim (up to) £21 per day for food and drink. This is only the case if you spend £21 per day on food and drink, if you spend £3 you can claim back £3. The dispensation literally sets a limit to which you can claim up to without displaying a receipt to the administrator. If the HMRC want to look into your expenses claims, they could (and probably will) ask for sight of your receipts.
• Umbrella companies in general market themselves as providing a solution to IR35. Their solution is that you pay full tax and NIC as if you are caught by IR35 (full PAYE & Employers NIC). They are not a solution to IR35, just an easy option to administer taxes.
• You cannot market yourself as a business (unlike other options).

Suggested questions to ask an umbrella company

1. What is my projected net return? How many working weeks a year has this been projected over?
2. What expenses have been included in your return projection (see overview point 4)?
3. Can they provide you with copies of the Professional Indemnity, Public and employees liability certificates?
4. Will you have to pay extra for Professional Indemnity, Public and employees liability?
5. What is the Excess on the Professional Indemnity, Public and employees liability? Often Umbrella companies take these insurances out with a very high excess to save costs. In reality, if the excess is high, is it worth having (compared to insurances purchased separately)?
6. Do they have any set up, minimum, admin or leaving fees?
7. Do they have a minimum service term, if so, what is the penalty?
8. How is on-going tax management handled?
9. Can they show you a copy of their current dispensation policy with the HMRC? Please see overview point 4.
10. If you make an expense claim for assets (such as computers) through the umbrella company, and the umbrella goes into liquidation, what happens to your equipment?
11. How much money is put aside for holiday and sick pay? While this money is being held, whose money is this legally?
12. As an employee you are legally entitled to statutory sick, maternity and paternity pay. Are you entitled to these statutory benefits (you should be)?
13. If the HMRC wants to investigate your tax payments, will you have to show the HMRC back dated expenses receipts?
14. If you are employed by the umbrella company, why will you be paid on different days to other ‘employees’ (i.e. other contractors using the same umbrella company)?

If you require further information, please call us on 01707 871610

Information on Off-shore companies