I often get asked by temporary workers, what is the difference between PAYE and UMBRELLA status when being paid.
I’m not an accountant, and for more financially intricate detail you would need to speak to one but I will cover off the basics so that you are in the know.
So, how does an umbrella company work? Umbrella contracts were initially set up to allow contractors and temporary workers to claim tax relief on some expenditures such as Travel, accommodation and food whilst they are on assignment. This is because temporary workers are disadvantaged in the fact they may have multiple assignments a year and not one place of work to account for to travel to.
Employment status, you will be employed by the umbrella company you work through, not the agency or the client, the umbrella company and you will submit expense forms and receipts to them directly for them to process.
It is important to know that you can only work through an umbrella company for a maximum of 2 years, and if you are still contracting after that you will need to decide if it is worth working through your own Ltd company or PAYE. An accountant can help you with this.
Are umbrella companies a scam? No, they aren’t scamming, they are fully regulated by the HMRC and have regular audits, but it is important that you choose the right one, one that is going to pay the tax on your behalf!
Do I have to pay for the service? Yes, the umbrella company will charge a weekly fee (which differs per company) which is why you should look at whether the fee out ways your tax relief and if you are going to be better off financially. The general rule is that if you earn less than £10 per hour, you should be on a PAYE contract as it wouldn’t financially benefit you.
How much will I be better off? This differs from person to person depending on your hourly rate and what expenses you are eligible to put through. It is best to speak with a Umbrella company that will work out both rates for you on a typical week earnings on an Umbrella contract and a PAYE contract.
Do I get holiday pay? This differs from umbrella company, but the general rule is no, the reason being is you will be paid the holiday accrual in your hourly pay, as because you are a contractor, you wont be normally be taking chunks of holiday during an assignment.
There are many other questions, but I have worked with many umbrella company’s in the past, one being Paystream, who genuinely offer a great , honest service, and they give you a full breakdown of your earnings. The team are very friendly and easily approachable and they are certainly one of the better umbrella companies in my experience.
If you are looking into Umbrella companies, my advice is speak to a couple and choose the one that feels right for you, make sure they give you ALL the information, and if they hide any financial information it is best to stay clear as you want a trustworthy company who is open book with you.