An umbrella company, also known as a PAYE umbrella, is a standard UK limited company run by a third-party supplier acting as an “employer” on behalf of its contractor employees.
A contract is signed between the umbrella company and the recruitment agency (or end client) on behalf of the contractor carrying out the assignment.
It is a company that self-employed contractors can join instead of forming (and working through) their own limited company.
A personal umbrella company handles administration (such as accounting and taxes) and relieves you of the burden of running a personal service company.
Your umbrella company also handles payroll. They bill and receive payment for the work you complete. Then they pay you through PAYE after deducting costs such as taxes, NI contributions, and workplace pension payments.
The umbrella company processes all timesheets and invoices and pays its employees a salary after deductions.
Why should you use an umbrella company?
Operating a limited company can be difficult, and it is not always the best option for contractors. Under IRS 35 regulations, many contractors can only work under an umbrella company structure.
If you’re a new contractor, you might not want to deal with the hassle of forming a limited company right away. Similarly, it is suitable if you know you’ll only be contracting for a short period.
Using an umbrella company allows you to avoid administration. It means you won’t have to maintain company records, file VAT returns, or manage all of the other responsibilities that come with being a limited company director.
What is the distinction between a Limited Company and an Umbrella Company?
An umbrella company differs from a limited type of company mainly because an individual will not become a director and do not have all of the responsibilities that come with it in an umbrella company UK. The company with which they make a deal will act as their employer and pay based on billed hours or days.
On the other hand, an individual operating a limited company is usually the director, putting them in charge of every transaction your company undertakes. This makes you responsible for everything, including tax payments, payroll calculations, and completing all required paperwork.