Using an umbrella company can be an alternative to working via your limited company. The umbrella company will therefore act as an intermediary between you and the clients that you work at (e.g. a nursing home or an agency which assigns you to a nursing home). The umbrella company’s main responsibility or purpose will be to organize payment for your work net of PAYE, NI and any administration fees that they will charge.
The main difference therefore between operating via your own limited company and under an umbrella is your employment status. Operating your own limited company means you are a director and can take advantage of a variety of methods for minimizing your exposure to tax – provided you are willing to take full responsibility for your financial affairs. On the other end, working via an umbrella company means you will be like an employee of the umbrella company and therefore eligible for PAYE and National Insurance contributions. Hence, while you retain much of the flexibility of being able to set your own working conditions and pick the shifts you want, the bulk of the paperwork and back-office administration is carried out for you by the umbrella company.
So practically how it works with an umbrella company is once a contract is agreed between you and say a local hospital, you will be required to log your time using a time sheet, which will normally be countersigned at the hospital by your line manager. The time sheet is then forwarded to the umbrella company who will use it to invoice the client (the hospital). Once the client (the hospital) has settled the invoice by paying the umbrella company, the umbrella company will in turn forward payment to you, less their fees and any PAYE or NI due. The umbrella company will send you a payslip that gives full details of how your pay would have been calculated.
Any other payment structure or arrangements e.g. being paid dividends, or loans etc. via an umbrella company has been declared illegal by the Government and, despite what some umbrella companies may tell you, there are no loopholes.
The key questions to ask an umbrella company before signing up with them are:
1. What are their fees and how do they calculate them. Some will charge a flat monthly fee others will charge a percentage of the invoice for work you do.
2. As they will act as an employer and deduct PAYE & NI, do they also pass on to you the circa 13% Employers NI contribution.
3. What allowable expenses can I claim e.g. professional membership fees, travel expenses etc.
4. Are there any hidden costs or penalties for leaving the umbrella company.