Contracting Through An Umbrella Company | IR35 | Umbrella Structures & How They Work

Introduction

Welcome back to Let’s Talk Money and Mortgages. Today, Gemma is joined by Sajam, WIS Umbrella Manager, who provides insights into umbrella structures for contractors.

How Does Umbrella Contracting Work?

Q: What is umbrella contracting?
A (Sajam):
As a contractor, you become an employee of the umbrella company.
The umbrella company manages payroll and ensures all taxes are correctly paid to HMRC.
Essentially, the umbrella company acts as an employer while you perform work for your end client.

How Do You Join an Umbrella Company?

Q: What is the process for joining an umbrella company?
A:
Agency Contract: The umbrella company communicates with your agency to obtain your agency contract. You review details such as day rate, start/end dates, and termination clauses.
Umbrella Employment Contract: You receive an overarching employment contract, which incorporates temporary workplace terms.
Contractor Assignment: Your assignment is attached for reference.
Timesheets & Payment: After completing work, submit your approved timesheets. The umbrella company raises an invoice to your agency, receives payment, and processes your salary to your bank account.

Why Use an Umbrella Company?

Q: What are the benefits of working through an umbrella company?
A:
Reduced admin work: Unlike a limited company, you don’t need to manage accounts or filings.
Straightforward payroll: Submit timesheets weekly or monthly; salary is processed automatically.
Disadvantages: Less control over tax withdrawals compared to a limited company; taxes include employer/employee NICs, apprenticeship levy, and income tax.

Key Assumptions for Umbrella Illustrations

Q: What should contractors be aware of when receiving income illustrations?
A:
Number of working days: More days worked increases salary.
Tax code:
1257L: If gross income < £100,000, personal allowance applies.
0T: If gross income > £100,000, personal allowance reduces gradually; use this for more accurate figures.
Tip: Differences in illustrations across umbrella companies usually reflect margins, not net salary, if assumptions are consistent.

Claiming Expenses and Pensions

Q: Can contractors claim expenses in an umbrella?
A:
Since 2016, HMRC’s SDC rules (Supervision, Direction, Control) limit expense claims if these clauses apply.
Allowed contributions mainly involve pensions:
Workplace Pension: Employee + employer contribution (paid from your income in umbrella companies).
Private Pension: Wis Umbrella allows contractors to choose pension provider and contribution amount, providing tax savings and flexibility.
Tip: Seek professional advice to determine optimal pension contributions based on day rate and contract length.

Offshore Umbrella Schemes

Q: Should contractors use umbrellas offering higher take-home via offshore companies?
A:
Avoid tax avoidance schemes.
The contractor is ultimately liable for unpaid taxes.
Check for reconciliation reports showing:
Income received
Employee deductions
Umbrella margin
Taxes paid to HMRC
Tip: Ensure transparency and HMRC compliance to avoid future liabilities.

Choosing an Umbrella Company – Why WIS?

Q: What are the benefits of working with WIS Umbrella?
A:
Accountancy expertise: Tax advice included.
Personalized service: Calls typically last 45 minutes to ensure full understanding of tax and contract implications.
Transparency & responsiveness: Fast responses to queries; personal touch with contractors.
Financial services in one place: Mortgages, insurance, investments, and accountancy streamlined.
Employee benefits:
Reward scheme (4,500+ stores discounts)
Virtual GP access
Fuel card applications
Same-day salary payments with email confirmation

Closing Advice

Points discussed may not apply to all contractors; consult an accountant if unsure.
WIS is available for guidance and support for contractors seeking umbrella services.