Umbrella Company Structure
Should contractors use a limited company structure or an umbrella company structure?
In essence, there are two main routes for the contracting individual to set up their payment structure. They can either opt to become a One Person Limited Company or use the services of an Umbrella Company.
By selecting the One Person Limited Company structure, the contractor becomes the director of the company. So, he, or she, has full responsibility for all company transactions as well as compliance with all company and statutory issues.
By opting for the umbrella route, however, the contractor submits timesheets and expense claims to an organisation perhaps serving many thousands of contractors. He allows, therefore, that organisation to take care of all accountancy, taxation and administrative matters.
Salary Only PAYE umbrellas
By stark contrast, in the PAYE umbrella solution the contractor effectively becomes an employee of the umbrella company. It is a legally sound model used extensively by many thousands of contractors across the IT sector. It is, also, now gaining popularity with engineering and construction professionals.
That is a status:-
- significantly reducing any likelihood of residual taxation,
- unfair dismissal or
- any other such employment rights claims the end user organisation faces.
In the PAYE umbrella model:-
- the contractor submits a timesheet,
- the umbrella company issues an invoice to the agency or end user and
- the umbrella pays net salary to the contractor after the deduction of National Insurance and Income Tax.
PAYE Umbrella Services
With PAYE umbrella service providers,they treat all income as salary.
That ensures that the contractor:-
- fulfils his or her Employer‘s National Insurance, Employee‘s National Insurance and PAYE obligations on all income, and
- that no residual taxation liabilities accrue for which the end user could be deemed responsible.
From the contractor‘s perspective, this will ensure that they make all tax and National Insurance commitments. It provides them with specific employee rights.
As far as the end user is concerned, they can take comfort from the fact that the contractor will not be legally their employee.
For further information on Umbrella Companies and a selection of good ones click on Which Umbrella Company?