Whether you are an independent contractor or a company looking to employ overseas contractors, it’s hard to organize and manage payroll without a local entity. Ensuring that you form independent contractor relationships correctly and following local regulations requires legal expertise. In addition, knowing how contractor payroll fits into local financial systems can be difficult.
Independent contractors use umbrella companies when they do not wish to go through the hassle of setting themselves up with a separate legal entity. Companies looking to hire short-term workers overseas as part of global expansion efforts may also find umbrella companies highly beneficial.
In either case, umbrella companies provide a quick, efficient, and fully compliant solution.
How Does an Umbrella Company Work?
Umbrella companies work by legally acting as employers of record, allowing contractors or employees to provide their services to other companies.
Typically, umbrella companies charge a minimal monthly fee, which may be as low as GBP30 per week.
As part of this arrangement, the umbrella company will handle all payroll tax deductions necessary for employment contracts. These include PAYE (Pay As You Earn; the UK system of taxes) and National Insurance contributions. This means that contractors can benefit from the same benefits as employees for a lower cost.
1. To provide services to a client company, a contractor signs a contract with an umbrella company
2. The umbrella company then becomes the legal employer of record for the contractor
3. The umbrella company signs a separate agreement with the client company for services
4. Going forward, the contractor provides monthly timesheets to the client and the umbrella company
5. The umbrella company manages payments and all human resources and payroll processes
6. The contractor receives a salary minus payroll taxes and the umbrella company’s service fee.
Umbrella companies function similarly to PEO (Professional Employer Organization) or global EOR (Employer of Record) services for international employees. It may then seem logical to see them as another type of global employment outsourcing.
However, they are distinct in some ways. They are often used for independent contractors on a more temporary basis.
An umbrella company can handle the essential elements of accounting and payroll. In general, they are less likely to manage the same breadth of HR functions that a PEO or EOR can manage. This distinction may make them less useful for full-time employees.
Umbrella Companies and IR35
Umbrella companies are mainly of interest to contractors or companies operating in the UK due to restrictions around IR35.
IR35 is the legal structure around off-payroll working rules in the UK. .In brief, it is tax legislation to ensure tax compliance for independent contractors. In many cases, companies used contractors who the government would typically count as employees. IR 35 ensures they pay equivalent amounts of National Insurance and pension contributions.
IR35 dissuades international employers from “disguising” employees as contractors to pay less employment tax. It requires social security contributions to be deducted from contractors’ fees in the same way as they would be from an employee’s salary.
Contractors working through an umbrella company are considered employees of that company to all extents and purposes. This allows contractors to provide services to clients without being affected by the complexities of IR35.
How Can You Make the Most of an Umbrella Company in the UK?
Despite being designed to work around legislation concerning contractors, umbrella companies are legal in the UK. Even the UK government website contains a guide for successfully choosing an umbrella company and avoiding potential future problems.
We suggest that if you form an agreement with an umbrella company, you should first check to see if they have established themselves correctly in the UK. Check their credentials and references, as they will be required to manage complex legal processes to a high degree of detail.
What Does an Umbrella Company Mean for Contractors?
Umbrella companies create the perfect opportunity for contractors and employers to make the most of global opportunities. Removing the need for establishing a separate entity, companies are much more capable of hiring the right contractors to fulfill essential short-term goals.
An umbrella company takes care of tasks that otherwise require hours of time and management to organize, like payroll.
This option specifically removes the most hassling or lengthy parts of a job for contractors in the UK. It allows contractors to fully devote their time and energy to tasks that lead directly to the project’s success. A professional provider can take care of everything that ensures peace of mind. This can include organizing payroll, PAYE taxes, National Insurance, and pension contributions.
The Overall Advantages of an Umbrella Company
Providing Benefits for Contractors
Offer what contractors traditionally lack without the necessary employment liabilities.
With an umbrella company contractors that you hire can have the same benefits management as full employees without the structure or salaried staff otherwise required.
Typically there is little chance of having essential workplace benefits offered as part of a work agreement for independent contractors. Employers who wish to appear competitive in the global market can offer these benefits through an umbrella company.
Both in costs, it saves from not setting up a separate entity and in day-to-day management
Umbrella companies take care of all the essential day-to-day parts of a project. These processes are necessary for a functioning business, such as organizing payroll to managing tax deductions. Still, they use up hours of work time that your employees could spend working on more profitable tasks.
An umbrella company enables you to open a business in your target market before hiring employees. In some cases, this could save you months of preparation time.
Less concern about payments, less distraction from bureaucracy
Having payments and payroll processes performed through a professional third-party company increases feelings of security for contractors and clients. An umbrella company adds a layer of liability that allows both contractor and client to perform their services without worrying about additional issues.
Legal expertise for all parties
Local regulations concerning independent contractors are often confusing and designed to find loopholes in agreements. In the past, these options were a way to avoid tax evasion through misclassifying staff. With an umbrella company, every possible detail is taken care of professionally. This protects both company and contractor by a higher level of compliance assurance than would be possible if they were managing these processes alone.
Employment Outsourcing Solutions and INS Global
INS Global is an employment outsourcing solutions provider with over 15 years of providing services to companies expanding worldwide. Now with services available in over 80 countries, we offer innovative tools and systems to manage HR functions wherever you are.
Our INS Global advisors specialize in every aspect of global expansion, from local labor laws, to global employer of record (EOR) services, and multi-country payroll systems. We offer our expertise and vast experience from day one so that you can expand quickly, easily, and fearlessly.
Contact our team today to learn more about what INS Global can do for you.