What is a PAYE Umbrella company?

We explain what the upsides and what the downsides are of working through an Umbrella company.

An Umbrella company provides a ready made invoicing vehicle for contractors and the contractor is an employee of the umbrella which could have hundreds, even thousands of individuals all on PAYE on its payroll.  In general terms, the individual is caught by IR35 and so there are no issues about status, other than the End User (and Agency) does not want to be the employer. 

The umbrella supplies the worker to the agency for a contract at the End User.  The benefit to the worker is that by being an employee of the umbrella, he can claim travel and subsistence expenses that would not be available to an employee deemed to be based ‘on site’.

The umbrella charges the worker a fee for the provision of its service, but the worker is still better off than someone on PAYE as an employee of the End User.  Umbrella companies come in all shapes and sizes – their main purpose is to make life simple for contractors while maximising their earnings; by taking responsibility for admin and compliance on behalf of the contractor and reducing the amount of tax that they pay.

Don't forget to look at PCG Umbrella, a fully compliant umbrella company.

The upside

• By joining a PAYE Umbrella you are handing over the responsibilities, admin and hassle to an umbrella company who bills your client through its own limited company structure and pays you a salary based on the work you do for your clients.  You still have to land your own work, but they do the rest, such as payroll, debt collection and paperwork.  It’s very easy, saves time, and removes the need to be aware of the legal requirements and risks involved with running a limited company.
• If your clients will not work with a sole trader, yet insist that you work in a way that is ‘deemed employed’ without wanting to actually employ you, this offers a way of working with those clients. However, be sure that the client knows what they are doing: PCG advises that if an employee is right for the position, clients should go ahead and hire an employee, and not attempt to get around the obligations this entails. If a contractor really is right for the role, there is not really any excuse for not using a proper business-to-business contract, so you may wish to negotiate changes to the terms.
• The fact that you are paid a salary and effectively have employee status helps with proof of earnings for loans and so forth.
• Although you are paid as an employee, you don’t have a boss.  You are your own boss and you decide who you work for and when.

The downside

• It’s not your own company and therefore it’s harder to build your own brand.
• It’s not tax efficient because all the money is paid as employment income.

Arriving at a verdict

If you are intending to contract for a short period, say a few months, this could prove to be the best option.  
The same applies if you are willing to forego the tax and commercial advantage of running your own limited company in order to rid yourself of the extra responsibility and paperwork.

If you are unavoidably ‘IR35 caught’ it also represents a good choice.

However, make sure that the umbrella company you choose is a PAYE Umbrella.  Any providers that claim to be able to pay you gross, without deducting tax at source, are likely to get you into hot water with the tax authorities.

See our guide to freelancing for more advice on running a business >> 

PCG Umbrella

PCG can provide you with a quality umbrella company that is fully compliant with the law.

Click here for information on PCG Umbrella >>