What Benefits Do Umbrella Companies Offer Workers And Employers?

Umbrella companies have become a common feature of the UK financial landscape

, yet despite this, they remain something of a mystery to many people. In this article we'll look at how the services provided by umbrella companies might benefit both employers and freelance workers.

It is common for recruitment organisations (agencies) to recommend an umbrella company's services to their freelancers and contractors in order to address their payroll needs.

In the UK, umbrella companies take the role of employers for contractors who are employed on a fixed term contract basis, usually through a recruitment organisation. The benefit to contractors is that umbrella companies offer a method of handling the large amount of paperwork that is frequently associated with becoming a freelancer, and to minimise liability, among many other services.

Umbrella companies will issue invoices to the recruiter, and upon the payment of that invoice, they will in turn issue payment to the contractor using the Pay As You Earn system (PAYE).

Another advantage of using an umbrella company is that the contractor can offset a range of expenses, including food, travel and accommodation costs in the line of work.

In 1999, the Government brought in legislation known as IR35. This legislation allows for the testing of employment status in order to evaluate whether a contractor can take advantage of tax benefits commonly enjoyed by small businesses. Since that date, there has been an increase in demand for umbrella company services.

Taxation

Umbrella companies use the same PAYE calculations as those used by most other businesses in the UK. The only difference in how much income a contractor takes home is the fee charge by the umbrella company and the amount of expenses claimed, although the service provided may vary across different umbrella companies.

Expenses

As mentioned above, a contractor can claim expenses incurred through their work via their chosen umbrella company. While an umbrella company will handle the contractor's expense claims, contractors should be aware that they are responsible for the calculations in the event that the HMRC discover any problems with the figures.

If you want to find out more about issues regarding expenses you can contact either HMRC or an umbrella company for further advice.

The internet provides a wealth of information that can shed more light on what is a very important subject as regards the modern economy. While this article gives a summary of some key points, there are others to consider.

by: Anna Stenning

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