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What is an Umbrella Company and How Does It Work?

For the past ten years, umbrella companies have thrived in the UK offering numerous opportunities for contractors with the help of the ‘hassle free’ business structure. Well, most people don’t have a clue about umbrella companies, and that is where we come in. This article will give you a clear explanation about umbrella companies, how they can flourish, and the distinction between a limited and an umbrella company.

  1. What is an Umbrella Company?
  2. How Do Umbrella Companies Work?
  3. Umbrella Company Expenses
  4. Difference between a Limited and an Umbrella Company
umbrella company
Many people usually choose to work at an umbrella company so that their administrative work can be reduced. (© unsplash.com)

What is an Umbrella Company?

This is a corporation that offers opportunities to contractors and freelancers who, through recruitment agencies, have been employed. This can only be made possible if a recruitment agency has engaged with the umbrella corporation and not with its contractor.

In such cases, a contractor becomes an employee of the umbrella company. Therefore, all the benefits that are usually associated with permanent employment like maternity pay, sick pay, and holiday pay can be accessed.

How Do Umbrella Companies Work?

In a nutshell, umbrella companies follow the routine mapped up below:

  • The umbrella corporation will come to a business agreement with a recruitment agency.
  • As a contractor, you’ll have to sign a contract with the umbrella company, to make you its employer.
  • Most contractors work under the client’s supervision because they will have to note the number of days or hours you have worked for them.
  • It will be your responsibility to have the details of your expenses sent to the agency and a copy to the umbrella company.
  • The umbrella corporation will send an invoice for the expenses that you may have sustained and the hours you have worked, to the agency.
  • The agency, in turn, will send an invoice to the client who you worked for, the full summary of your expenses and working hours spent.
  • The agency then pays the client.
  • According to its payment schedule, the agency pays the umbrella company.
  • In turn, the umbrella corporation pays you via the PAYE (Pay As You Earn) system, after deducting the taxes and national insurance.
  • Similar to long-established employment, you will receive a pay slip that shows the full summary of your deductions.

Umbrella companies come with certain advantages to a contractor. One of them is holiday pay in case you are willing to take a break. These corporations also do all the paperwork for personal meaning; all that is required of you is to submit your timesheet and expenses, then you can wait to get paid. This makes it the best for contractors, especially if PAYE is included.

Umbrella Company Expenses

One of the crucial things that need to be noted as you join an umbrella corporation is the expenses that you will sustain against your income bill. Tax relief, on the other end, can only be offered to the expenses specifically and exclusively to the costs which have explicitly incurred in the course of performing the work assigned to you.

The expense rules are usually complicated to understand that’s why in this section, we’ll guide you.

We will start with the typical stuff that contractors claim tax relief on:

  • Computer software, if it is essential for your contract work.
  • Business accessories, especially those you need under the terms of your contract.
  • Business phone or mobile call cost unless it’s used purely for business purposes.
  • The costs of printing and stationery.
  • Training (only if it’s for contract purposes).
  • Accommodation if you are working temporarily away from home.
  • The eye tests (if you are included in computer-related roles).
  • Transport expenses to and from the temporary workplace or if it is part of your contract.
  • Sustenance costs, especially if you are temporarily working away from home.
  • Service costs (Following your contract duties).

The most significant point to remember is that: the only things you can have a claim for are the ones that you have paid for. Always note that for any questioning, you need to keep full records of your expenses for the entire year.

Difference between a Limited and an Umbrella Company

In this section, we will demystify the question “what is a limited company?” and “what is the distinction between a limited and an umbrella company?” To begin with, a limited corporation is a type of business structure whereby the corporation is considered a separate body legally.

It is vital to know the distinctions between an umbrella and a limited company, especially if you are choosing where to work between the two companies and the effects they’ll offer to your career. Below is a detailed expose of the differences between the two.

What is an Umbrella Company?

An Umbrella company differs with a limited type of company mainly because you aren’t a director and don’t have the full responsibilities that are associated with it. The corporation that you make a deal with, will act as an employer and pay you per the hours you’ve worked.

This corporation comes with the advantage of allowing the contractor more personal time and work is made much more manageable. All in all, are you a contractor that values their freedom? Then an Umbrella corporation is the most appropriate choice.

What is a Limited Company?

An individual who works as a limited corporation becomes the director, hence making them in taking charge of every transaction your corporation undertakes. This makes you responsible for everything from tax payments, payroll calculations, and completing all the necessary paperwork. If you are beginning as a contractor, you need to be thorough as you search for the right corporation that fits your exact situation.

Are you ready to handle all the significant responsibilities of your corporation, and become your boss? Then a limited corporation is what you are looking for.

Many people usually choose to work at umbrella companies so that their administrative work can be reduced. But when it comes to the distinction between a limited and an umbrella company, it can be confusing for a person who has never been to either of them before. With that having been said, we hope that you’ve learned much from this article.

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