Taxation issues frequently hit the headlines in the UK thanks to the hugely complex nature of the country’s tax system. There is also an outcry from time to time about multinational companies effectively avoiding paying much, if any, tax. For the many individuals setting up as contractors, either through a recruitment company or by taking on a variety of clients themselves, dealing with tax and national insurance affairs can prove time-consuming and complicated.
Contractors naturally want to concentrate on what they do best – operating the core business that makes them money – and more and more individuals are turning to umbrella companies as an effective solution to organising their tax affairs. Put simply, an umbrella company acts as an employer for contractors who have a contracted assignment. This means that the umbrella company carries out all of the administrative work that a contractor would otherwise have to deal with instead. The company liaises with the contractor’s client or agency and makes sure that all contracts and documents, including schedules, are on file.
A solution for PAYE payroll
The IR35 tax rule was meant to close a loophole that enabled many freelance professionals and contractors to avoid paying a lot of tax as well as a large amount of National Insurance Contributions. Umbrella companies offer a complete PAYE payroll solution by giving contractors an employment contract once a commercial contract has been secured. This provides the contractor with the status of an employee and allows the umbrella company to invoice the client or recruitment agency and then pay the contractor. The payment is made through PAYE, and there are other significant benefits to be had from this type of arrangement.
Contractors, especially those who are relatively new to this type of work, will find that they incur a range of business expenses. These will include the purchase of essential equipment for work, travel expenses when going to meetings, site visits or conferences and the cost of meals and accommodation when away from home or the office. All such genuine expenses can either be offset against income or, if reimbursement has been agreed upon by the agency or client, the umbrella company will invoice the client/agency and pay the contractor when the invoice has been paid.
Other benefits of umbrella companies
As an employee of an umbrella company, a contractor can benefit from a range of tax efficient schemes, which could include a pension scheme, childcare vouchers and charity donations. Contractors may also be entitled to other benefits such as health insurance, professional insurance and discounted training courses. They will also have entitlement to various employment rights including the minimum wage, maternity and paternity pay as well as holiday and sickness pay.
As the employer, the umbrella company will receive a contractor’s P45 or P46 and apply the relevant tax code. Personal allowances can be maximised and a payslip produced to support their payroll. When the financial year ends, contractors receive a P60. When employment has ended, the umbrella company will produce a P45.
Using umbrella companies is an attractive and affordable way for contractors to minimise their administrative burden whilst ensuring that they meet all their legal requirements.
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