When you decide to work via an agency for public bodies, you need to be aware that the are a couple of differences on how you get paid. If you become a Backstop Agency Worker, we offer individual guidance, but this might serve as a first overview.
An umbrella company is an option for freelance contractors who are looking for a hassle free payroll product which allows them to submit business expenses to reduce their taxable income. If you are a contract freelancer looking for a way to work on multiple assignments without having the set up cost, responsibility and administration that comes with having your own Ltd Company, then an umbrella company is what you are looking for. An umbrella company is designed to deliver tax efficient payment services for contractors.
An umbrella payroll company acts as an employer to contractors and freelancers who usually work under temporary contracts or assignments and provide a fully HMRC compliant employment service.
Recruitment agencies issue contracts to the contractors umbrella provider, they then issue invoices to the recruitment agency (or client) and, when payment of the invoice is made the umbrella company pay their contractors (same day).
Umbrella Company- Advantages
Avoids time and trouble of running a limited company. After a simple set up the contract only need to submit expenses to the umbrella company.
No need to be involved with running a spreadsheet, VAT returns, payroll matters, company accounts, taxation, etc.
No legislation risk.
No start up or close down costs
Contractor online portal to submit expenses each week
Umbrella Company- Disadvantages
The contractor cannot represent themselves as running their own independent business, through which they can make policy decisions, take risks or act as company director.
Working through an Umbrella the contractor will be paying PAYE tax.
Working through an Umbrella the contractor can’t pay themselves via dividend
Your Own Limited Company
Setting up and running your own limited company can be very prosperous, the tax advantages of working through a limited company are greater than that of working through an Umbrella Company, Sole Trader or PAYE however establishing your own limited company is not a short term proposal and will require a great deal of commitment.
After you have set up a ltd company bank account you will have to ensure that the accountancy, bookkeeping, credit control, and insurances are taken care of whilst also ensuring you secure work and keep up to the minute with employment and tax laws.
Limited Company – Advantages
Contractor can be seen to be “representing” the company and “running a business” with its own trading name.
Complete control of all transactions and company matters.
Full control of revenue- paid directly into the company bank account, as opposed via an umbrella company bank account.
Faster payment and administration process due to direct control.
Smaller tax burden (higher percentage net pay) for contract revenue earned outside of the IR35 legislation.
Limited Company – Disadvantages
The amount of administration/paperwork arising.
Responsible for day to day issues as invoicing, keeping a simple accounting system and fully liaising with their accountant, to ensure all forms, returns and accounts are filed by the due dates.