Umbrella Companies

For first time contractors one of the first choices you have to make is how you want to operate as a “self employed” individual, in this respect there can be a whole new lingo to learn. Contractors who specialise in any number of areas now have to add another string to their bow and learn the basics of how to run a business. Just to complicate things even further there are also the legalities regarding the various structures that exist to ensure contractors as self employed individuals can retain as much of their earnings as possible.

Outside of contracting people who want to go self employed seem very limited in what they can do. They either go through the complexities of setting up and managing their own business (which offers limited liability advantages) or they exist under the status of being self employed. Either way the core of this is the person running their own business, invoicing, accounts, all of the admin work. Working for yourself in your own time this is all part of the game and is to be expected. For contractors though things are a little different, a contractor is working for one client at a time (for the most part) and it is very much a case where time is money. It’s no wonder then that contractors look for something a little more hands off when it comes to the admin side of things.

There are plenty of solutions out there that promise great returns for the contractor but for some, like I said above, it’s not so much about getting most out of their contract, it’s just about lessening the administration burden and for these the Umbrella Company is the perfect payroll solution. In an Umbrella Company setup the contractor acts as an employee of the umbrella company who in turn handle all the administration work. Payroll is processed as if you are an employee and all PAYE deductions should be accounted for by the Umbrella Company. It’s understandable that the convenience comes at a cost and with umbrella companies that costs is usually represented as a fixed amount, not based on your contract value. There is no more work involved to an umbrella company if you are earning £2000 a week or £20,000 a week. A good ball park figure is somewhere between £15 and £25 per week. Add on to this your standard PAYE deductions and you can see that this may not be the most efficient way of working (lets not mention holiday pay, pensions etc either) so it really comes down to the contractor to negotiate the best possible rate for themselves in order to make contracting under an umbrella company pay.

Some Well Known Umbrella Companies

A huge number of companies offer umbrella company services, there are some of the more well known ones:-

1st Contact Umbrella
RACS Group
Smartwork Umbrella

Faster Payments – Coming Soon

When it comes to choosing a payroll provider for your contracting services one of the main considerations is how quickly will you get paid? We all work to get paid and with most of us living a life that involves standing orders and direct debits the sooner we can get funds in the better.

The great news is that the UK Banking Industry is introducing a new system that will significantly speed the whole process up, where as you have to pay a fee for a CHAPS payment to get a same day credit there will soon be no need. Faster Payments Service will allow almost instant (at worst up to 2 hours after a payment instruction has been issued) inter payment between banks that have signed up. Eventually it is hoped that all UK banks will jump on board.

Faster Payments goes live on the 27th of May 2008, following that there will be a period where some banks are still joining the system. During this period if one of the banks involved hasn’t joined then a standard 3 day payment cycle will still be in use. The moral of all this is this, in order to get your pay on the same day for free after the 27th of May, make sure that both your bank and your payroll providers bank are signed up to the Faster Payments Service.

Contracting Under An Umbrella Company

An Umbrella service or company acts as a in-between for your contracting services. Essentially you enter into a contract with the Umbrella company that makes you a PAYE employee. Your end client or representing agent then also enters into a contract with the Umbrella for your services, they pay the Umbrella Company which then pays you as an employee.

Benefits Of Using An Umbrella Company

For the cautious contractor an Umbrella Company is very easy to use, all tax and NI is deducted before you get paid, you are a PAYE employee. You need do nothing more than send send in timesheets and expense claims and wait to be paid by the Umbrella.

The Downsides Of Using An Umbrella Company

With simplicity comes expense, unfortunately operating under an Umbrella Company is the most expensive way of working in terms of both income Tax and NI.

EBT Scheme – Employee Benefit Trusts

Unsure About EBT Schemes? There is an Alternative Payroll Solution Available!

With an EBT Scheme you are the employee of an offshore company and will pay normal UK P.A.Y.E. on your income from the company. The salary offered will usually be much less (hence less Tax and NI) than the amount the offshore company receives from the invoices for your services whilst contracting.  In being the employee of the offshore company you are eligible to participate in the Employee Benefit Trust which makes payments to company employees, this is quite legitimate and is seen as a way of rewarding key staff.   EBT payments are based on the profit the company has generated from employing you – effectively this is the difference between the amount invoiced for your services whilst contracting and the cost of employing you (your basic salary). For legal reasons to remain free from taxation these payments from the Employee Benefit Trust cannot be guaranteed.  This is where the risk with EBT schemes is.

The EBT route has been in use for many years during which there have been several changes in legislation attempting to block this option but many of the offshore companies that offer an Employee Benefit Trust scheme have modified their procedures to remain within the law.  It is still essential to review the legal opinion of any company offering an EBT pay scheme for contractors.