As you step into contracting work, you will need to decide whether to run a limited company or use an umbrella company. Going with an umbrella company has some benefits. A PAYE umbrella is simply a company that acts as the overall employer to agency contractors. The contractors then work under a fixed contract assignment.
How Does a PAYE Umbrella Company Work?
For a contractor, it is very important to understand how the PAYE companies work. The moment you join a PAYE umbrella, you become an employee of that company. The company will then, under your instructions, invoice the agency based on timesheets submitted at the end of the day, week, or month. The umbrella company will then send you your net pay after they’ve deducted National Insurance and Income Tax on your earnings. This is one way for contractors to work inside the IR35 regulations. Usually, joining a PAYE company is easy – all you need is to find an umbrella of your choice and register.
PAYE Umbrellas and IR35
IR35 is a piece of legislation that is used in the UK to determine the way in which you pay tax. An IR35 status will be attached to each contract you work. The status can either be inside IR35 or outside. This will be based on the nature of contracts you have and the relationship you have with your clients, an inside status is given where if your company did not exist you would be an employee of the client.
Since IR35 only applies to contractors working through a limited company, if your contract is deemed inside IR35 it may save on administration to use an umbrella company. There are different types of umbrella companies, PAYE umbrellas are more expensive but can involve less administration to get set up. If your contract is outside IR35, in order to reduce the tax burden, you should consider starting your own limited company. This will give you significant savings in taxes.
It’s very important to note that IR35 status is not constant. It’s determined based on the nature of each contract you have and the way you work for each clients. If the nature of the contracts changes, you may have a new IR35 status. This will also have implications on taxes. You can talk to an accountant to help you navigate these complicated obligations.
What You Should Consider Before Joining a PAYE Umbrella Company
Before you decide to join a PAYE umbrella company, there are a few important things you need to know. Financial considerations should be your first concern. You also need to choose an umbrella company that can cater for contractors who work for a succession of different clients, as this is how most contractors work. Check the reputation of the umbrella company, the fee structure, and also its certification.
Joining a PAYE umbrella company has many benefits for contractors, especially when it comes to reducing your administrative burden. There are many umbrella companies in the UK today so it should be easy to find a good option for you. The simple guide above will definitely come in handy.