Every contractor operating through an umbrella company, or considering this route, should know about salary sacrifice.
Salary sacrifice is a benefit open to employees in the UK, meaning that contractors that choose to work through an umbrella company have the option to take advantage of this scheme.
In this guide, Umbrella Search explains what salary sacrifice is to help every umbrella contractor find out more about how this can help them.
What is salary sacrifice?
Salary sacrifice is an agreement formed between an employer and an employee in which the employee agrees to give up a part of their salary in return for a non-cash benefit, usually an employer pension contribution.
The employee can choose how much they wish to sacrifice and this can either be a fixed amount or a percentage of their monthly salary.
So, what's the benefit of salary sacrifice?
The main benefit of salary sacrifice is that it reduces the employees' overall pay. This means your overall income is reduced, meaning less tax and National Insurance is due and more is saved into your pension pot. Pension contributions are not subject to tax and National Insurance, meaning this a good option for those looking to save more for the future.
Is salary sacrifice available to umbrella company contractors?
As we have mentioned, salary sacrifice is an option open to UK employees. As an umbrella company contractor is an employee of their chosen company, it is usually the case that umbrella companies will offer this option to contractors.
So how does it work?
The umbrella company will invest the amount chosen by the contractor straight into their pension pot before it is processed through PAYE and subject to tax and National Insurance contributions.
This is a great opportunity for umbrella company contractors to benefit from an additional tax break whilst also allowing them to save more for the future in their pension pot on top of their standard workplace pension.
Is salary sacrifice right for me?
Before you decide to sacrifice a portion of your salary, contractors should first do their research to weigh up whether this is the right option for them.
The first main point to consider is that by sacrificing some of your salary, contractors will be taking less home at the end of each month. Therefore, contractors should consider whether they are in a financial position that allows them to do so.
Similarly, if contractors are looking to get a mortgage or loan, a lower income can impact how much they can borrow, which should be a consideration for contractors looking to move home, get onto the property ladder or secure credit.
However, although there are points to consider which may be disadvantageous to contractors, for many umbrella company contractors, salary sacrifice is an attractive proposition.
After all, with salary sacrifice, umbrella contractors can reduce their taxable income whilst paying more into their future.
Other benefits of umbrella companies
As well as benefiting from salary sacrifice through an umbrella company, umbrella contractors also enjoy a range of other benefits.
Firstly, an umbrella company makes contracting much easier and more hassle-free for contractors.
Once signed up with their chosen umbrella provider, the contractor merely needs to input their timesheet to the company. From here, the umbrella company will invoice the client, chasing any late payments.
The umbrella company will collect the fee directly from the client. They will process the payment through their payroll, meaning the correct levels of tax and National Insurance will be deducted in line with PAYE tax bands, before it is then paid to the contractor.
This saves the contractor the task of having to invoice the client and also means they don't have to undergo the time-intensive and often tricky task of dealing with self-assessment tax returns, which self-employed contractors have to do.
As well as taking care of the contractor's finances, an umbrella company will also deal with the necessary admin and paperwork on the contractor's behalf, helping to free up more of their precious time and energy.
As the umbrella company's employee, the contractor also benefits from qualifying for statutory benefits. This means that the contractor will receive paid leave for sickness, time taken off for holiday and maternity or paternity leave.
This is also considered a significant benefit to the contractor as it means they have a safety net should they need to take time off from work. Find out more about contractor sick pay and other statutory benefits in our handy guide.
An umbrella company will also provide the contractor with the necessary levels of insurance. For example, as the contractor's employer, every umbrella company is legally required to cover the contractor with employer's liability insurance which protects the contractor in case they become ill or injured on the job.
On top of this, many umbrella companies also provide the contractor with professional indemnity insurance and public liability insurance. This is yet another benefit of operating through an umbrella company for contractors.
If you are considering making the move to umbrella company in order to take advantage of things such as salary sacrifice, hassle-free contracting and to have your finances and admin taken care of for you, you will now need to find the best umbrella company for you.
Find an umbrella company with the help of Umbrella Search
Now you've decided that an umbrella company is the best option for you, it's time to find a provider that's the perfect fit for your contracting needs.
That's where Umbrella Search can help. By simply telling us a little bit about yourself, we will take on the hard work and due diligence to find an umbrella company that's just right for you.
Whatever you're looking for in an umbrella company, our team of professionals will find it. To find out more, or to try it out for yourself today, simply get in touch with the Umbrella Search team today.