Umbrella Companies : A Short Guide
Umbrella companies act as employers for agency contractors. An umbrella company will dispatch invoices for work carried out to clients, and when the money is received, the umbrella company will issue you with the payment. The idea behind them is to make life easier with regards to receiving payments and tax calculations. It provides an alternative to setting up your own company and is generally the most cost effective way for you to operate. What an umbrella company does for you is something that you could potentially do yourself, but you have to ask yourself if it is really the best use of your time. Having an umbrella company deal with your finances means no VAT returns to complete, no tax issues and, simply put, it can enable you to spend more time making money.
Once a payment has been received by the umbrella company, they may either make a payment to your bank account immediately or they may send you fortnightly payments including a pay-slip with information on the total amount received and any deductions made. You will be paid by Pay As You Earn so all deductions are calculated by the Inland Revenue. The only variation between the amounts received from the umbrella companies will be due to their costs for supplying the service. Be wary if an umbrella company offers a service that can reduce your income tax or national insurance contributions as this is in fact illegal. You are permitted to claim for your expenses and these will be processed for you by your umbrella company. Expenses that are chargeable to your client or agency will be refunded to you in full, and those which are not chargeable will be processed as a tax benefit.
This means that your expenses will be taken off your taxable income. However, remember that all expenses must be allowed by the Inland Revenue and that they must be directly referable to your employment. An umbrella company should only charge you a fixed fee as if you earned $50 a day or $500, their amount of work would be the same. If they quote you a percentage of your earnings as a fee then you should be wary of using that company. Regardless of how much you are earning, if you are paying more than $50 a week in fees then you are not getting a good deal. If you do work for an agency, also be wary of their recommendations for an umbrella company as they are often given incentives to help sell the services of certain companies. Research online to find the best deal for you.
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