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Frequently Asked Questions
We have created a frequently asked questions section which hopefully answers some of the main questions you may have. We will continue to build on this as more questions are asked.
An umbrella company is a company that employs contractors who work on temporary contract assignments, calculating your tax and NI contributions and making payments to HMRC The way an umbrella company works is pretty simple. The contractor becomes an employee of the umbrella company. This means that the agency if youre working with one will pay the Umbrella Company and the Umbrella Company, deducts the necessary PAYE and national insurance contributions and pays you your salary.
There are numerous advantages to being employed by an umbrella company. First of all, you will not have to manage your taxes, National Insurance or payroll. This can be challenging if you are new to your contracting career and are not literate in financial affairs. With this out of the way, you can focus on growing your contracting business.
Secondly, you won’t require as much starting capital when working with an umbrella company compared to establishing a limited company. This frees up funds to invest in expanding the business.
Furthermore, an umbrella company gives you the freedom to outsource administration. This way, you can focus on day-to-day work rather than spending time engaged in tedious paperwork. Not only is this monotonous and time-consuming, it does not generate revenue for your business.
If you are new to the contracting and freelancing world you have probably been advised to find yourself an Umbrella Company. An Umbrella Company will employ you under an overarching Contractor of Employment and will be responsible for raising invoices for the work that you do whilst on assignment, this means that you will not have the worry of setting up and running a company or appointing an accountant. Please be aware that due to legislation changes if they fall foul of IR35 they will no longer be able to run via a ltd company.
IR35 is legislation designed to prevent the practice of ‘disguised employees’. That is when workers supply their services to end clients as a contractor via an intermediary, such as an agency or limited company. It is possible that they could pay a lot less tax and National Insurance when working in that way, compared to the sums they would owe if they were on the client’s books as a regular employee.
IR35 applies to those contractors who would be considered an employee were it not for the intermediary vehicle. If they fall within IR35 rules, the contractor deemed to be a disguised employee would have to pay the same income tax and NICs as any other employee.
Small businesses and individual contractors who are genuinely working for themselves should not, in theory, have anything to fear from the IR35 legislation. However, it can be all too easy to fall under the purview of IR35 if you do not have a clear idea of how it works and what it all means. Being investigated by HMRC can be intimidating, so it helps to follow best practices in all your contracts and to be prepared if your business affairs do come under scrutiny.
As a contractor, there are two ways in which you can operate: through your own limited company or under a PAYE umbrella. Both options offer a number of pros and cons depending on your experience, the length of time you intend on contracting and the level of time you have to dedicate to paperwork.
Forming your own limited company
Contracting under your own limited company means that you will be in charge of your accounts, your salary and your taxes. You will need to establish your limited company and open your business bank account. As the limited company director, you will control invoicing, the company bank account and decides on how much to pay yourself, which is made up of a combination of salary and dividends.
Contracting through a PAYE umbrella
Working under an umbrella company, on the other hand, means that this will be the responsibility of your umbrella company who will act as your employer. You submit your timesheet to your umbrella company who will then pay you a salary with National Insurance and tax already deducted.
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