Umbrella companies for contractors
Discussion
Hi, I wonder if anyone can share their experience on this?
My son has just been offered his first contract role in IT after passing his apprenticeship. It's only 6 weeks but a good company so it's a start.
His recruitment company suggested he use an umbrella company for payroll. From what I understand it means he's paid the same but can claim his expenses, which on his junior hourly rate would really help. Their weekly fee would be partially offset as a claimable expense and the rest would be offset against the items he can claim on.
I know nothing about these companies, I was self-employed last year and filed my own tax return. He, however would struggle with the admin and keeping money back for tax so he doesn't want to go self-employed at this stage.
Does anyone have any experience of this and is there anything he needs to be aware of?
Many thanks
My son has just been offered his first contract role in IT after passing his apprenticeship. It's only 6 weeks but a good company so it's a start.
His recruitment company suggested he use an umbrella company for payroll. From what I understand it means he's paid the same but can claim his expenses, which on his junior hourly rate would really help. Their weekly fee would be partially offset as a claimable expense and the rest would be offset against the items he can claim on.
I know nothing about these companies, I was self-employed last year and filed my own tax return. He, however would struggle with the admin and keeping money back for tax so he doesn't want to go self-employed at this stage.
Does anyone have any experience of this and is there anything he needs to be aware of?
Many thanks
Awful that a young lad is straight away being pushed down the "contract" route.
Is there no one out there willing to take someone like him on as a proper employee.
Later on, when he has matured and gathered more work (and life) experience, maybe then the "self employed" contractor route may be the best option. But when starting out in the workplace, a proper stable employment is better - I think.
Is there no one out there willing to take someone like him on as a proper employee.
Later on, when he has matured and gathered more work (and life) experience, maybe then the "self employed" contractor route may be the best option. But when starting out in the workplace, a proper stable employment is better - I think.
parakitaMol. said:
Hi, I wonder if anyone can share their experience on this?
My son has just been offered his first contract role in IT after passing his apprenticeship. It's only 6 weeks but a good company so it's a start.
His recruitment company suggested he use an umbrella company for payroll. From what I understand it means he's paid the same but can claim his expenses, which on his junior hourly rate would really help. Their weekly fee would be partially offset as a claimable expense and the rest would be offset against the items he can claim on.
I know nothing about these companies, I was self-employed last year and filed my own tax return. He, however would struggle with the admin and keeping money back for tax so he doesn't want to go self-employed at this stage.
Does anyone have any experience of this and is there anything he needs to be aware of?
Many thanks
Agree with Eric, however must take issue with "From what I understand it means he's paid the same but can claim his expenses" as this implies it is better than "Limited", but is not necessarily so as he'll be liable for both employer and employee NI, along with a more burdensome PAYE rate.My son has just been offered his first contract role in IT after passing his apprenticeship. It's only 6 weeks but a good company so it's a start.
His recruitment company suggested he use an umbrella company for payroll. From what I understand it means he's paid the same but can claim his expenses, which on his junior hourly rate would really help. Their weekly fee would be partially offset as a claimable expense and the rest would be offset against the items he can claim on.
I know nothing about these companies, I was self-employed last year and filed my own tax return. He, however would struggle with the admin and keeping money back for tax so he doesn't want to go self-employed at this stage.
Does anyone have any experience of this and is there anything he needs to be aware of?
Many thanks
However if his new contract is deemed to be inside IR35 you may as well go with a Payroll company in this instance.
Lots of helpful (and cynical) info on the contractor uk forum.
Thanks both for your speedy replies!
Eric, he'd love to find a permanent employer, from what I can gather their IT is now outsourced by IBM and this will be in place within the next couple of months - otherwise he may have gained a perm role. However, it's better to take this and get some experience and references than hold out for the ideal. He's fairly well placed in Guildford for places like Farnboghorror, Woking and Reading - so it could be worse!
Worthy, I'm not sure what inside IR35 means, and he's been told he would be an employee of the payroll company. They are called Parasol.
He doesn't want to go self-employed at this stage, I don't think it would be suited to him.
Eric, he'd love to find a permanent employer, from what I can gather their IT is now outsourced by IBM and this will be in place within the next couple of months - otherwise he may have gained a perm role. However, it's better to take this and get some experience and references than hold out for the ideal. He's fairly well placed in Guildford for places like Farnboghorror, Woking and Reading - so it could be worse!
Worthy, I'm not sure what inside IR35 means, and he's been told he would be an employee of the payroll company. They are called Parasol.
He doesn't want to go self-employed at this stage, I don't think it would be suited to him.
Edited by parakitaMol. on Saturday 30th April 11:03
i have been contracting for the last 18 months and use a company called connor williams, though they are reliable in paying me every friday i am getting fed up of having to pay employees and employers NI and pay them £15 a week for the pleasure of being paid so need to pull my finger out and find an alternative way of getting my wages
Compared with self employment, easier to find clients.
Compared with your own limited company, less hassle. I got a phone call on a Friday saying 'they want you to start on Thursday', rang an umbrella company that afternoon and everything was in place by Wednesday. If I'd set up a limited company it could have taken weeks to get a company bank account and I'd have accountancy bils to worry about.
Compared with your own limited company, less hassle. I got a phone call on a Friday saying 'they want you to start on Thursday', rang an umbrella company that afternoon and everything was in place by Wednesday. If I'd set up a limited company it could have taken weeks to get a company bank account and I'd have accountancy bils to worry about.
Dr Jekyll said:
Presumably because they don't want the committment of employing permanent staff that they can't get rid off easily at the end of the project or when circumstances change.
But they have to pay anyway. You are costing them as much as any employee in tax and NI terms as they will be paying the umbrella company a fee to use you. You can bet that the umbrella company will be charging them a fee to cover the amounts they are paying you - which will incude PAYE and NI costs.The umbrella company will also be charging YOU so there will be some additional deductions coming out of what they pay you over and above PAYE and NI.
From what I can see, all an umbrella company is is an agent which supplies supplies temporary staff.
Eric Mc said:
Dr Jekyll said:
Presumably because they don't want the committment of employing permanent staff that they can't get rid off easily at the end of the project or when circumstances change.
But they have to pay anyway. You are costing them as much as any employee in tax and NI terms as they will be paying the umbrella company a fee to use you. You can bet that the umbrella company will be charging them a fee to cover the amounts they are paying you - which will incude PAYE and NI costs.The umbrella company will also be charging YOU so there will be some additional deductions coming out of what they pay you over and above PAYE and NI.
From what I can see, all an umbrella company is is an agent which supplies supplies temporary staff.
Perhaps you are right and the client is foolish to use contractors, but that is their problem not mine.
The umbrella company isn't a staff supply agency, the contracts between the client and the agency and between the agency and me were signed before the umbrella company got involved.
If they are were an agent providing temporary staff, what's wrong with that?
Nothing - except that the employee is no better off. They are paying the full whack of PAYE and NI and maybe even having amounts deducted by the umbrella company for the "services" they are providing.
Traditional agencies tended to charge the employer rather than the individual they were placing.
What concerns me is that the real employer, i.e. the company you are actually doing the work for, seem not to want to take on staff properly. In other words, they redfuse to make any sort of commitment to the people they use. It may all make some sort of economic sense in the short run, but I have a strong sense that part of the demise of this country is the short termism of employers and unwillingness they have of comitting to engage properly the people they use. Loyalty can work both ways - if people chose to want it that way.
Traditional agencies tended to charge the employer rather than the individual they were placing.
What concerns me is that the real employer, i.e. the company you are actually doing the work for, seem not to want to take on staff properly. In other words, they redfuse to make any sort of commitment to the people they use. It may all make some sort of economic sense in the short run, but I have a strong sense that part of the demise of this country is the short termism of employers and unwillingness they have of comitting to engage properly the people they use. Loyalty can work both ways - if people chose to want it that way.
Eric Mc said:
What concerns me is that the real employer, i.e. the company you are actually doing the work for, seem not to want to take on staff properly.
In the case of my son, the employer has outsourced its IT services to IBM and so they cannot take him on. However there is still work to be done unil that time. As for the rest of the discussion - I am now more confused than I was when I posted this question.
Eric Mc said:
Nothing - except that the employee is no better off. They are paying the full whack of PAYE and NI and maybe even having amounts deducted by the umbrella company for the "services" they are providing.
Traditional agencies tended to charge the employer rather than the individual they were placing.
What concerns me is that the real employer, i.e. the company you are actually doing the work for, seem not to want to take on staff properly. In other words, they redfuse to make any sort of commitment to the people they use. It may all make some sort of economic sense in the short run, but I have a strong sense that part of the demise of this country is the short termism of employers and unwillingness they have of comitting to engage properly the people they use. Loyalty can work both ways - if people chose to want it that way.
The employee usually is a bit better off in that the client is prepared to pay a higher rate to avoid the risk of having to pay redundancy or sick pay. At my last permanent job there were permanent staff on 45-50k working alongside contract staff on around £60/hour.Traditional agencies tended to charge the employer rather than the individual they were placing.
What concerns me is that the real employer, i.e. the company you are actually doing the work for, seem not to want to take on staff properly. In other words, they redfuse to make any sort of commitment to the people they use. It may all make some sort of economic sense in the short run, but I have a strong sense that part of the demise of this country is the short termism of employers and unwillingness they have of comitting to engage properly the people they use. Loyalty can work both ways - if people chose to want it that way.
The agencies DO charge the client rather than the individual being placed. Umbrella companies are not agencies, they are providing the service which the contractor would otherwise have to organsie partly themselves and partly pay an accountant for. So yes, of course they charge for the service just as an accountant would, it costs me less than an accountant would charge for a limited company so I'm getting good value.
If the job the contractor is doing is not part of the core business, why on earth should the client 'engage properly'? If they want expertise for an advertising campaign or to fix the plumbing they don't necessarily want to put experts on the payroll, it may make more sense to hire an advertising agency or plumbing firm, who then hires staff on PAYE, just like an umbrella company.
There is no law saying that all employees have to be full time.
There is now law saying that temporary staff/employees cannot be hired through normal employment agencies.
What is the superiority of an umbrella company over a traditional employment agancy?
Why is an umbrella company looked on as an alternative to an individual setting up their own limited company? Surely an umbrella compaby is really an altrernative to
a) full time employment
b) part time employment
c) temporary employment
d) employment through an agency
It isn't a replacement for a form of "self employment" - or is it?
And finally, if the individual is being treated as an employee by the umbrella company, surely the employment obligations pass to the umbrella company anyway - or has the umbrella company some dispensation from treating its employees according to employment law?
There is now law saying that temporary staff/employees cannot be hired through normal employment agencies.
What is the superiority of an umbrella company over a traditional employment agancy?
Why is an umbrella company looked on as an alternative to an individual setting up their own limited company? Surely an umbrella compaby is really an altrernative to
a) full time employment
b) part time employment
c) temporary employment
d) employment through an agency
It isn't a replacement for a form of "self employment" - or is it?
And finally, if the individual is being treated as an employee by the umbrella company, surely the employment obligations pass to the umbrella company anyway - or has the umbrella company some dispensation from treating its employees according to employment law?
Edited by Eric Mc on Saturday 30th April 09:30
Have a look at http://www.foremansllp.com/umbrella.php . They are a smaller firm that have do v ery well in reviews on customer service on contractor comparison sites. If your Son needs abit of hand holding in the process someone like this will be much better than the likes of Parasol
While IT contracting as a career choice does sometimes make sense, I'd say usually it's at the high end £40+ an hour (or equivilent day rates) where you can make your own choices around clients, pensions, training etc.
For a lad just out of apprenticeship its just for convinience of the (non)employer. 6 weeks also doesnt sound like much of a contract, I hope the rates reflect such a short term contract. Thats especially true is IBM are about to come in and there isn't much chance of contract renewal. Is there the chance IBM will take him on when they transition service, or is it definatly just a stopgap role?
OP - for such a short term and presumably low rate contract Parasol will be fine. Its quick and easy, they will try to cover their fees by paying expenses which are tax free. The other options are much more expensive and also much more long term - if your lad is just wanting the 6 weeks work and especially if he would prefer a permie role later, then there is no point whatsoever going for ltd companies or anything like that. In fact, if he is on a low rate he probably could not afford any other route.
Parasol will deduct paye and NI (both employers and employees) from his rate before they pay him. They will also deduct and keep 'banked' some pay to cover a small number of stat holidays, which he can take when he likes once they have 'banked' enough to pay him (usually bank holidays). If he is not working away from home then the expenses will be minimal, but every little helps. No sickpay except government statutory. Parasol should be able to give him an estimate of how much he will get in his pocket net per week given hourly rate and his expense circumstances.
Good luck.
For a lad just out of apprenticeship its just for convinience of the (non)employer. 6 weeks also doesnt sound like much of a contract, I hope the rates reflect such a short term contract. Thats especially true is IBM are about to come in and there isn't much chance of contract renewal. Is there the chance IBM will take him on when they transition service, or is it definatly just a stopgap role?
OP - for such a short term and presumably low rate contract Parasol will be fine. Its quick and easy, they will try to cover their fees by paying expenses which are tax free. The other options are much more expensive and also much more long term - if your lad is just wanting the 6 weeks work and especially if he would prefer a permie role later, then there is no point whatsoever going for ltd companies or anything like that. In fact, if he is on a low rate he probably could not afford any other route.
Parasol will deduct paye and NI (both employers and employees) from his rate before they pay him. They will also deduct and keep 'banked' some pay to cover a small number of stat holidays, which he can take when he likes once they have 'banked' enough to pay him (usually bank holidays). If he is not working away from home then the expenses will be minimal, but every little helps. No sickpay except government statutory. Parasol should be able to give him an estimate of how much he will get in his pocket net per week given hourly rate and his expense circumstances.
Good luck.
Eric Mc said:
There is no law saying that all employees have to be full time.
There is now law saying that temporary staff/employees cannot be hired through normal employment agencies.
What is the superiority of an umbrella company over a traditional employment agancy?
Why is an umbrella company looked on as an alternative to an individual setting up their own limited company? Surely an umbrella compaby is really an altrernative to
a) full time employment
b) part time employment
c) temporary employment
d) employment through an agency
It isn't a replacement for a form of "self employment" - or is it?
And finally, if the individual is being treated as an employee by the umbrella company, surely the employment obligations pass to the umbrella company anyway - or has the umbrella company some dispensation from treating its employees according to employment law?
I assume the 'now law' above is a typo for 'no law'? Or did I miss some new legislation?There is now law saying that temporary staff/employees cannot be hired through normal employment agencies.
What is the superiority of an umbrella company over a traditional employment agancy?
Why is an umbrella company looked on as an alternative to an individual setting up their own limited company? Surely an umbrella compaby is really an altrernative to
a) full time employment
b) part time employment
c) temporary employment
d) employment through an agency
It isn't a replacement for a form of "self employment" - or is it?
And finally, if the individual is being treated as an employee by the umbrella company, surely the employment obligations pass to the umbrella company anyway - or has the umbrella company some dispensation from treating its employees according to employment law?
Edited by Eric Mc on Saturday 30th April 09:30
Umbrella companies have grown up out of 2 drivers - 1) IR35, and 2) cost.
IT contracting used to be quite lucrative - up until both Y2K eating all the IT budgets for the years ahead and IR35 trying to kill the practice, it was easy to cover your ltd company expense, holiday, insurance and pension costs and make up for them via higher rates and using dividends to avoid NI liabilities (note I said avoid not evade
).Now, many multinationals prefer to use temporary staff for their IT, or outsource alltogether. Usuing contract staff is becomming more common for lower paid IT staff - simply to keep them off the corporate books. They must think its cheaper to do this than to have non-salary staff costs and responsibilities on their books. At the lower end of the payscale, ltd companies don't stack up, and IR35 application is harder to disprove for junior staff who usually are more managed than senior/consultant lvl people.
Thats when the umbrella companies kick in. They manage the payrole with minimal risk to the corporate, the contractor doesnt get ANYTHING their rate doesnt pay for from them, and usually they try to avoid the 2 year expense and employment rights rules. The holiday rights thing is a case in point - uk employment law states that an employee is entitled to certain holidays. So the umbrella company skims off enough of your daily rate to give you these holidays, but only when you have accrued enough dosh to pay yourself for them.
So they provide a service, in THEORY you are employed by them, but in practice everything you get comes from what you invoice your client and you pay them for that privilegde too.
Edited to add: So in summary I don't believe lower paid contractors are any better off working for an umbrella than if their client took them on as temporary staff - much the opposite in fact and the big companies know this.
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