Written by DangerMouse
- For tax purposes, be regarded as an employee of the client; and
- For NICs purposes, be regarded as employed in employed earners employment by the client.
- Umbrella companies are used very commonly in the IT industry; they provide an alternative to a Personal Service Company (one man Ltd company) for workers wanting to operate as contractors. Agencies within the industry understand the way an umbrella company operates and will therefore offer a rate to the worker which is well in excess of the rate that they would offer should the worker be taken on their books as an employee.
An umbrella company is a relatively new concept within the construction industry and, unfortunately, what is marketed as an umbrella company may be nothing more than a tax avoidance scheme which could leave workers subject to significant tax penalties at a later date.
A proper umbrella company will engage the worker under an over-arching contract of employment and will engage with the agency via a business to business contract. Invoices will be raised for the work done and when payment is received from the agency the umbrella company will meet its legal obligation to HMRC and make their Employer’s NI contributions. They will also deduct their margin which is around £25-£30 per week and make contributions to a pension scheme through the auto-enrolment scheme where applicable. The balance of funds is the worker’s salary which is then subject to PAYE taxes. All of this information should be given to the worker by the umbrella company before an employment contract is signed.
The umbrella company is then liable to pay maternity pay, paternity pay, adoption pay, sick pay etc etc and this should be made as a cost to the business, it should not be a deduction from the worker to only be paid back at a later date if circumstances arise.