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Complete guide to getting paid through an umbrella company

When it comes to contracting, there are several ways contractors can operate, from running a limited company, using a PAYE agency or working through an umbrella company.

When considering which option is best for your contracting needs, how you will get paid will be a big factor in the decision-making.

To help make the choice a little easier, in this guide Umbrella Search outlines how contractors get paid through an umbrella company, so you can see if this is the best option for you.

Why use an umbrella company?

Before we talk about how contractors get paid through an umbrella company, let's start by looking at what an umbrella company is and why a contractor would consider this option.

A contractor will choose their chosen umbrella provider and pay them a monthly fee. In exchange, the umbrella company will employ the contractor and provide them with a plethora of benefits.

Although they are employed by the umbrella company, the contractor is completely free to choose which contracts they work on, when, and with which clients. However, the umbrella company will take care of tasks such as finances, admin and paperwork on the contractor's behalf, meaning less hassle and stress.

In fact, the umbrella company pays the contractor a salary, deducting tax and National Insurance, sends out invoices on their behalf, provides the contractor with the necessary levels of insurance, gives the contractor statutory benefits like holiday and sick leave, and is on hand to offer advice and guidance to the contactor when they need it.

What about a limited company?

The other option that contractors can opt for is to work through a limited company.

With this option, a contractor has to set up and run their own limited company. This not only means that the contractor has to deal with all aspects of contracting, from invoicing the client, chasing any payments that are late, all aspects of finances and organising insurance, they must also take on the responsibilities of running a limited company.

Here, as the director of a limited company, the contractor has a set of responsibilities and duties, including:

  • Set up and follow company rules as part of its articles of association

  • Keeping company records and reporting any changes

  • Filing company accounts and a company tax return

  • Paying corporation tax

What is an umbrella company?

How contractors get paid through an umbrella company

As we have touched on, when a contractor uses the services of an umbrella company they become an employee of their chosen provider. The umbrella company will therefore pay the contractor a salary and put them on their company payroll.

Contractors must first decide how they will charge their time, whether this is by the hour or by the day. There are both benefits and drawbacks to each option, you can find out more about both in our handy guide.

The contractor must merely submit a timesheet to the umbrella company, informing them of any expenses incurred, and the umbrella company will invoice the client on the contractor's behalf.

The way that umbrella company contractors are paid is through PAYE which stands for pay-as-you-earn. This is the most common way of paying tax in the UK and means that tax deductions are worked out and taken off your pay before the contractor receives it. The contractor can see how much they have paid in tax and National Insurance on the payslip they will be provided by the umbrella company.

What does this mean for contractors? Well they merely have to worry about turning up for the contract at hand and don't have to get involved in tax affairs and salaries which can be complex and time consuming.

What about a limited company?

The way that limited company contractors are paid differs from the way that umbrella company contractors are paid.

When you set up a limited company, you are responsible for invoicing the client, paying yourself a salary, ensuring you leave aside enough for tax and National Insurance payments, and filing tax returns.

This means that it is the contractors themselves that are responsible for paying themselves and working out tricky tax calculations. Not only must contractors file a self-assessment for personal tax payments, but as we have mentioned they must also file a corporation tax return for the company taxes.

This often adds an additional layer of complexity to contactor's lives and so many choose to use the services of an accountant to offer a helping hand. Although this helps to make the contractor's life easier, it is worth noting that this incurs an additional cost, usually of around £125+ per month.

Is getting paid through an umbrella company the best option for you?

Having read our handy guide, if you have decided that working and getting paid through an umbrella company is the best option for your contracting career, Umbrella Search is here to help.

We know that contractors have enough on their plates without having to deal with complex finances, salaries and taxes, so we know that an umbrella company is usually the easy and hassle-free way to contract.

That's why we're here to help every contractor find an umbrella company that's just right for them. Whatever your contractor needs and preferences, we will work closely with you to find an umbrella company that's the perfect fit.

Our friendly team will carry out the research and due diligence to provide you with a list of umbrella companies that match your needs. To see how we can help you, and to take the first step to finding an umbrella company that works for you, get in touch with the Umbrella Search team today.

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