Tax For Contractors & Expats, Umbrella Companies

What are Umbrella Companies?

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An Umbrella Company is a readymade Invoicing & Payment vehicle for Freelance Contractors. The Umbrella Company acts as the ‘ultimate employer’ whilst the Contractor works on site at a Client, normally via an agency.

Umbrella or Limited Company?

If the contract you are going to be working further to is caught by IR35 or you just don’t fancy all of the hassle and administration that goes with running your own Contractor Limited Company then an Umbrella Company is for you!

There are many UK Umbrella companies. At Commonwealth Contractors we work with Umbrella Companies who specialise in looking after highly skilled ‘expat’ contractors.

If you are interested in finding out more about an Umbrella Company solution call Commonwealth Contractors now on 0330 390 9021 or Submit your Details to speak to a highly experienced advisor!

Contractors Umbrella Company vs Contractor Limited Company

There are two main contracting options that exist for freelance contractors. You can either choose to use an;

  1. Contractor Umbrella Company, OR
  2. A Contractor Limited Company

The way contractor payments are structured varies significantly between the two structures.

Contracting Option

Payment Structure

Umbrella Company

 With an Umbrella Company Contractors receive;

  • Reimbursed Business Expenses, AND
  • PAYE Salary Payments

Since Umbrella Company Contractors are ‘employed’ it is not possible to take divided income. The disadvantage to PAYE Income is that Employers National Insurance is paid at the rate of 13.8% uncapped above the minimum threshold. This means that the Contractor pays more tax than an individual who is using a Contractor Limited Company AND who is Outside IR35. Please note that IR35 Status is very important. You cannot take Dividend Income if you are Inside IR35.

Contractor Limited Company

 Contractor Limited Company Contractors normally take;

  • Reimbursed Business Expenses, AND
  • A small PAYE Salary (around £12k pa), AND
  • Dividend Income

As Contractors who go into business with their own Contractor Limited Company are considered to be ‘self employed’ they can take Dividend Income from the company and therefore save significant amounts of Employers National Insurance. Please note that you can only take Dividend Income if you are working further to a contract which is Outside IR35.

Employment Status

If you use an Umbrella Company then the Umbrella Company will be become your ‘legal employer’. Many first time contractors get a bit confused as to whom their employer actually is and this can lead to miscommunication when dealing with organisations such as the HM Revenue and Customs.

Contract & Payment Chains

Normally you will have an ‘employment contract’ with the Umbrella Company, and the Umbrella Company will sign up to a ‘service contract’ with a client or agency. Therefore the chain or contracts is normally;

Freelance Contractor (Employee) – Umbrella Company – Agency – Client

In terms of payments; signed timesheets will be provided by you (the Freelance Contractor) to the Umbrella Company, then;

  • The Umbrella Company invoices the Agency
  • The Agency invoices the Client
  • The Client pays the Agency
  • The Agency pays the Umbrella Company
  • The Umbrella Company pays you (the Freelance Contractor)

The Umbrella Company (your ultimate employer) deducts from billings received;

  • Income Tax
  • Class 1 National Insurance (Employers & Employees NI)
  • An agreed Margin

Net Salary and Expense Payments are then made to you.

By using an Umbrella Company you will benefit from minimal administration, greater net take home pay (where expenses are taken) and peace of mind (you will never face an IR35 Investigation).

Find out More

To find out more about Commonwealth Contractors call now on 0330 390 9021 or Submit your Details and we will get right back to you!

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