Quick Guide to Umbrella Company Paperwork

An umbrella company does three things:

1. Provides 'limited company' status
2. Turns timesheets into cash
3. Calculates & pays taxes directly to HMRC on a contractor's behalf.

When a contractor uses an umbrella company they become an employee of that umbrella company which then takes care of all the paperwork involved in contracting.

Low Tax Bill

The umbrella company will sign the recruitment agency's contract(s) on behalf of the contractor, invoice the recruitment agency (or in some instances the client directly), collect the money when it becomes due and pay the contractor their net pay directly into their personal bank account.

Sometimes a contractor may be able to claim certain business expenses, which could help them reduce their tax bill, and so take home more money compared to working directly through a recruitment agency.

Umbrella Company Fee

All compliant umbrella companies work within the same HMRC guidelines when calculating what tax the contractor should be paying, and most umbrella company services will request receipts from the contractor for any business expenditure they may wish to claim for.

Umbrella companies charge a fee in return for:

1. Enabling the contractor to have limited company status
2. Entering into contracts on behalf of the contractor
3. Raising invoices
4. Keeping proper records of all transactions
5. Taking care of PAYE, NIC & VAT tax requirements
6. Ensuring the correct net pay is transferred to the contractor's personal bank account

This means the contractor can get on with what they know best and is not stuck for hours completing complex official forms & spreadsheets.

Business Expenses

It is really important that contractors only claim for business expenses which have actually been incurred and which also comply with HMRC rules.

An umbrella company service is like an ‘off the shelf' limited company that comes complete with a full back-office administration team, designed for freelance contractors who don't want to go to the bother of setting up & running their own limited company.

Managing your own limited company is time consuming, expensive and complex. Contrast this with the service of an umbrella company which is simple, quick & doesn't require much input from the contractor.