What is a PAYE Umbrella company?
Freelancing through a PAYE umbrella
An umbrella company provides a readymade invoicing vehicle for freelancer. The freelancer is regarded as 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, so there are no issues about status. The umbrella supplies the worker to the agency for a contract at the client. 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 client.
Umbrella companies come in all shapes and sizes – their main purpose is to make life simple for freelancers while maximising their earnings; by taking responsibility for admin and compliance on behalf of the freelancers and reducing the amount of tax that they pay.
- 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. It 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.
- The fact that you are paid a salary and effectively have employee status helps with proof of earnings for loans.
- 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.
- The worker is that by being an employee of the umbrella, they can claim travel and subsistence expenses that would not be available to an employee deemed to be based ‘on site’.
Questions to ask yourself
- Are you are intending to contract for a short period? If the answer to this question is yes, for 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.
- Are you unavoidably ‘IR35 caught’. If so, it also represents a good choice. IR35 does not apply to umbrella companies, because the freelancer is an employee and is paid by PAYE and expenses – not dividends.
Top tip: you need to make sure that you choose 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.
Will an offshore company protect me from IR35?
Some freelancers have been told that they can use an offshore company to avoid IR35. It does not matter where your company is incorporated as this does not affect how HMRC determines IR35 status. There are freelancers working in the UK with companies incorporated in countries such as Ireland, the Netherlands and so on. There are reciprocal legal and tax agreements between the UK and these countries. However, some agents and clients are nervous about dealing with foreign companies.
Certain offshore schemes have used an umbrella structure and divert bonuses or other income into loans or employee benefit trusts. Whilst IPSE cannot comment on specific cases, arrangements of this nature are subject to very close scrutiny by HMRC (particularly since the June 2010 Budget and the subsequent anti avoidance legislation that has either been passed or proposed) and indeed some schemes have been successfully challenged by HMRC with retrospective taxation applied. Careful investigation should be applied before entering into any of these arrangements, schemes of this nature are not covered under IPSE’s tax investigations insurance policy.
- Locate umbrella services in the Supplier Directory
- Download IPSE's Guide to Freelancing
- Umbrella Calculator to calculate taxes and take home pay when using an umbrella company
- Guidance on Managed Service Companies for contractors