If you’ve decided to use an umbrella company, you’ll find from a tax point of view that the experience is not very different from being a normal employee although certain business expenses may be tax deductible to slightly improve your net earnings. These savings will however typically be eaten up to cover the umbrella’s monthly charges.
In essence, an umbrella is a limited company of which you become one of many employees. The umbrella carries out all the invoicing on your behalf and they credit your personal bank account with pay net of all taxes. The advantages over running your own company lie in the simplicity of administration and the flexibility to move in and out of the scheme at the drop of a hat. Many contractors start down this route as a hassle-free way to see if contracting is a life that suits them.
I’m afraid we can’t make any recommendations of individual umbrella companies other than to suggest a web search using the words “umbrella” and “IT” but we have one very important stipulation: Your umbrella must provide employment outside of the scope of section 5 of the Agency Worker Regulations which have effect from October 2011.
Agency Worker Regulations
This new legislation is designed to prevent abuse of (typically) low-paid workers whose working conditions as a temporary worker may not be comparable to those enjoyed by permanent staff working for the same employer. This applies to actual income, but also to benefits such as annual leave and duration of working time. Under the new legislation the temporary worker is, after 12 weeks with the same client, entitled to enjoy the same employment terms as the permanent employee.
In the case of our contractors, the legislation is largely irrelevant: you can expect to earn as much as twice what you would receive for performing the same role as a permanent employee. Quite the opposite from the situations the law is aiming to redress. And you certainly wouldn’t want to swap all that extra pay for an extra entitlement to holiday pay, which you would be required to do if you made a claim under the new rules!!
However, our customers are naturally nervous of any new legislation so we need to reassure them that they are not at risk from the new law. To this end, your umbrella will have to provide confirmation that they operate what is known as “The Swedish Derogation Model”, a system of employment which places you outside the scope of section 5 of the regulations. We’ll also need to exchange a document which identifies the premium you will be earning over and above your counterparts in permanent jobs at the same client. This document provides you and the client with important reassurance. In your case, that you are earning remuneration above and beyond the norm, and, for the
client, that they should not fear action under the regulations. When you sign up with an umbrella, make sure they meet this requirement or we’ll ask you to find an alternative umbrella.
If you would like further information on the options available to you, please contact our office.