What is an Umbrella Company? And How Does It Work?

An Umbrella company is an enterprise which employs contractors who work on temporary assignments through recruitment agencies or directly with end clients. Contractors submit time sheets to the umbrella company which are used to issue the agency/end client with an invoice for the working hours.

On receipt of the payment the Umbrella Company process the contractors pay by making deductions of tax, National insurance & pension contribution if the contractor hasn’t opted out of pension auto enrolment.

Depending on your SDC status (Supervision, Direction & Control) you may or may not be legally allowed to be able to claim for expenses, if you’re not sure check your assignment details or give us a call and we can work this out for you. But there are some instances which you can still claim for expenses even if you’re under SDC. These expenses can be claimed directly from the HMRC but only if you unconditionally incurred the expenses performing employment duties and can cover:

• Uniform/ Work Clothing

• Tools to carry out work

• Subscriptions/ Professional Fees

• Business calls

• Hardware & Software purchased

• Working from home allowance

How Dose an Umbrella Company work?

1. A contractor finds an assignment which requires he/she to be paid via Umbrella or is in side IR35.

2. Contractor signs up with an Umbrella Company as an Employee.

3. The Umbrella Company & Agency/end client signs a commercial contract.

4. As per the assignment details the contractor carries out work and submits his hours to his employer (The Umbrella Company)

5. On receipt of the hours the umbrella company invoices the agency/end client.

6. Once the payment has been received, the umbrella company deducts any operational costs and send the rest of the payment to be processed for the contractor.

7. The payment is processed and statuary deductions set by the income threshold for tax, national insurance and any other deductions such as pensions or student loan are deducted and paid to the HMRC, Pensions provided or loan company.

8. The remainder after deductions is paid to the contractor along with a summary of all deductions.

Compliant umbrella companies follow this process and all income minus operational cost is taxed according to the HMRC requirements. It’s very important to watch out for rouge Umbrella Company UK who offer 90% take home pay. Most of them don’t pay the correct tax and national insurance on your behalf and we have seen the HMRC come after these doggy umbrella companies and also the contractor, to get the under paid tax liability’s repaid so it’s very important you don’t fall for this 90% take home trap.

Smart Choice Umbrella

Smart Choice Umbrella supports all its employees and takes the hassle away from contracting specially under IR35. We are proud of the service we offer and offer same day payments. We offer a service which gives all our contractors the peace of mind that its everything is under control. We are fully U.K. based and have a dedicated team of specialist at hand to assist you all the way to pay day.