right to work in the UK

Updated 2016 (this article about using an Umbrella Company was previously in our ‘Workline’ database but is no longer published on the Crunch website).

Using an Umbrella CompanyMany freelancers and contractors choose to use the services of an Umbrella Company to deal with their finances – these are limited companies that employ contractors. If you choose to do this, your contracts will be treated for tax purposes as if they are all inside IR35.

Umbrella companies deal with the payroll aspect of your employment and all your accountancy and tax issues and employ you (the Contractor) on a PAYE basis (called an ‘overarching’ contract). Instead of being paid directly by your clients, as a Sole Trader or Limited Company would, your payment will be processed by the Umbrella Company. You will submit a timesheet, including details of any expenses, to the Umbrella Company, who bill the client.

The Contractor has an employment contract with the umbrella and the umbrella holds the assignment contract with the agency or the client. Certain expenses (travel and subsistence) can be claimed that can reduce your tax bill – this is no longer possible from 6th April 2016, see details here – and usually Umbrella Companies provide Employers Liability Insurance, Professional Indemnity Insurance and Public Liability Insurance as part of their fee.

Umbrellas also often offer contributory pension schemes, medical cover and other benefits. You should receive statutory minimum workers entitlements, such as holiday entitlement, national minimum wage, rest breaks, maternity pay and so on, while employed by an Umbrella.

There are a number of drawbacks:

  • The tax burden for Umbrella Company contractors is often far higher than for those who are directors of their own Limited Company.
  • All salary drawn through an umbrella is subject to National Insurance Contributions.
  • HMRC have a ’24 month rule’ that says if you have been based (or will be based) at a specific site for 40% or more of your time for more than 24 months, it is no longer regarded as a temporary place of work and you are therefore no longer entitled to claim business expenses (NB This may need to be updated).

However, there as also advantages:

  • You will generally not be required to complete an annual self-assessment as tax will be deducted at source.
  • If you have Visa restrictions you may not be able to form a Limited Company so an Umbrella Company could be a good option.
  • Umbrellas can be a good ‘safe’ option if you are in between permanent jobs and looking for a short-term solution, or new to contracting and are worried about understanding all the information you need to be aware of to operate legally (IR35, tax, NI etc).

The Government, in 2015, consulted on removing tax relief on Travel and Subsistence Expenses where a worker is employed through an employment intermediary and works under the supervision, direction and control of any person. This became law on 6th April 2016.