This Is How A PAYE Umbrella Company Works
If you have been following the last few blogs, you will know that we have covered the most appealing option of becoming a self-employed individual in the UK by telling you who needs a contractor umbrella company and how to set yourself up as a Limited Company.
In the last blog, we covered how an umbrella companies work, by mentioning a few things briefly. But in this blog, we look at exactly a PAYE contractor umbrella company works. We will cover getting started with a PAYE contractor umbrella company, contracts, payment, etc.
If you are wondering whether or not you need to be using a contractor umbrella company, then have a quick read of the first blog here!
As a bonus, we will also tell you all about the fee structure in a PAYE contractor umbrella company to make sure that you are fully convinced that you are in fact, ready to works as a contractor in the United Kingdom.
So, now let’s get started!
Breakdown Of How A PAYE Contractor Umbrella Company Works
Once you have set yourself up as a limited company, you will have the very important task of choosing the right contractor umbrella company for which you will be an employee. Once you become an employee, you will have to follow the following standard process.
Registration With A PAYE Contractor Umbrella Company
Think of this as the recruitment process in a normal job. This is the process of becoming an employee under your chosen contractor umbrella company.
As you would have expected, the first thing that you must provide is your P45 or P46. If you do not know what this is or how to get this, speak to your accountant, or your last employer. Your contractor umbrella company will also be able to help you get access to it.
After you get your P45 or P46, or relevant documents, you will have to provide all your other details such as your National Insurance number. Once you have provided all that, you must then provide your banking details to get your payments from the PAYE contractor umbrella company.
At this stage, you will also have to prepare and complete signing contracts. You will sign an employment contract with your umbrella company and the PAYE umbrella company will also sign a contract with a recruitment agency.
By the end of this stage, you will have gotten everything in order for you to complete your first job as a UK contractor and receive your payment from your PAYE contractor umbrella company.
Invoicing Your PAYE Umbrella Company For Contracting Work
As a contractor working under a PAYE umbrella company, you will have to submit a timesheet to your umbrella company weekly or monthly, as per your contractual agreement.
This will include your days and hours worked on particular contractor jobs and any related details.
Your umbrella company will then create and submit the invoice based on your timesheets to the recruitment agency. The recruitment agency will make payment to your contractor umbrella company.
The recruitment agency and umbrella companies will have standard process of disbursing payments, daily, weekly or even monthly based on their payment model.
Payments & Deductions As A PAYE Umbrella Company Employee
As per your banking details and your agreed upon payment cycle, your contractor umbrella company will make payments directly to your bank account. Similar to the standard payslip it will have your hours worked, rate of pay, salaried income, etc. along with your deductions for income tax (PAYE) and National Insurance Contributions (NICs).
As you would expect, there will be the additional deduction of the umbrella company fee and any other deductions as per your contract agreement.
In the terms of agreement with your contractor umbrella company, you will have a defined the things which are classed as expenses. According to that you will also submit an expense claim sheet to your umbrella company.
Some Pointers Before You Sign With A Contractor Umbrella Company
- There are hundreds of PAYE umbrella companies out there and you should always conduct sufficient research before signing with one
- One of the primary things to look out for when researching umbrella companies is the fees they charge and the customer service satisfaction
- There are fraud umbrella companies which offer fantastic rates under many schemes which should be avoided
- Other than the contractor umbrella company fee charged by a particular PAYE umbrella company, there should be no difference on how to calculate you after tax pay
So, do not fall prey to contractor umbrella service providing schemes and be sure to choose a trusted and reputed PAYE umbrella company.
Bonus: Fees You Should Be Paying A PAYE Umbrella Company
One of the most important things that UK contractors like yourself, in any sector, is the fees that their chosen PAYE umbrella company will be charging them.
We looked at how a PAYE contractor umbrella company works and the entire process, but if you don’t choose the best one in terms of the service provided for your hard-earned money, you will be on the losing side.
Fee Structure Of A Typical PAYE Umbrella Company
In essence, there are two main types of fee structures that a PAYE umbrella company works in. One being a fixed rate model and two being a percentage share-based model.
Let’s find out what each of these two types of contractor umbrella company fee structures mean for you – the contractor!
Umbrella Company Fixed Fee Structure
In the fixed fee structure, the PAYE umbrella company charges a fixed fee per week or month, based on your contractual agreement. So, you will know exactly how much you have to pay each week or each month, regardless of how much you earn from your contract working hours or jobs.
There are obvious pros to this structure as you will always be aware of how much you will need to pay. But in the off chance that you do not have any jobs, you will still have to pay the contractor umbrella company fees to ensure they continue to provide their services for you.
Umbrella Company Percentage Fee Structure
In the share-based fee structure, you will be paying a fee which will be a proportional value of your invoices – a percentage. However, there are complexities to the calculation as some invoices may have a fixed percentage of fee while others may or may not be capped in the same way.
Given the fee can be whole lot if you happen to be particularly busy with loads of contracting jobs, this umbrella company fee structure is not common.
The Average Expected PAYE Contractor Umbrella Company Fees
Now, you may be wondering that regardless of these payment structures, etc. There must be an average expected fee that needs to be paid. Yes, there is but relying on average fee is not the best way to consider your expected umbrella company fee.
As we have already established, the most common way an umbrella company charges its fees is a weekly or a monthly fee.
Some of the biggest contractor umbrella company fees per week is approximately £20 to £30 per week, according to published prices of 2019. The monthly prices among these umbrella companies range between £80 and £130 per month. These are the prices charged by the more established or transparent PAYE umbrella companies in the market, others may charge more, less or a similar average fee.
One of the great things about the umbrella company fees is that it has remained fairly competitive and constant over the last decade due to stiff competition. While service fee is a very crucial factor in choosing the right PAYE umbrella company, it is certainly not the only factor.
Don’t write off percentage share-based umbrella company fees completely. For example, you will pay a percentage of your invoices but that percentage could be capped which may mean you are not simply spending a fixed percentage for all invoices. On the contrast, with fixed fee you will potentially save a lot more regardless of how much you work or invoice your chosen contractor umbrella company.
If you are a contractor who is earning high or working a large amount of jobs, you must seriously consider the umbrella company fees, expenses, etc. since you could lose out on a lot of money from your pockets. Whether you work for £1000 or £10000 a month, your contractor umbrella company will not have to work any more or less, they will simply do what they are supposed to anyway.
That brings an end to this article about how a PAYE umbrella company works for the typical UK contractor. If you are a contract worker in the UK then that means you are much more learned about this crucial aspect of being a self-employed individual in need of a PAYE contractor umbrella company.
While we have focused on the costs associated with working as an employee of an umbrella company, you must still be wondering about all the other factors which you will need to consider before choosing one. We promise to follow up this blog with another which will cover some of the most important tips to ensure that you are choosing the right PAYE umbrella company.
Until then, make sure you research umbrella companies, ask for recommendations from other contractors or friends in the industry and always keep up to date with the latest by following contractor umbrella company and contractor related blogs on Comparison Contractor.
See you on the next one!