Choosing the right path for you
Choosing the right contracting setup can be overwhelming, but with the right guidance, it doesn’t have to be. At Crystal, we specialize in providing contractors, consultants, and freelancers with flexible and compliant employment solutions. Whether you’re considering setting up and managing your own limited company, joining a hassle-free umbrella company, or exploring international umbrella options, our expertise ensures you make the best decision for your needs.
With our industry knowledge and experience, we simplify the process and help you navigate the best path to maximize your earnings while staying compliant. Whether an umbrella company, PSC (Personal Service Company), or an alternative is right for you, we’ll make your choice crystal clear. Use our income calculator above to see how different options compare and find the most profitable and efficient solution for you.
Not all Umbrella Companies are created equal
An umbrella company is a business that employs agency freelancers for short-term contracts, usually through a recruitment agency in the UK. Unlike recruitment agencies, umbrella companies do not source jobs for contractors; instead, they act as payroll intermediaries.
Recruitment firms prefer to work with umbrella companies because they reduce the agency’s liability and ensure compliance with employment and tax laws. The umbrella company acts as the contractor’s employer, handling payroll and tax deductions on their behalf.
The umbrella company issues invoices to the recruitment agency (or end client) based on the agreed contract rate. Once the payment is received, the company processes the contractor’s wages via PAYE (Pay As You Earn), deducting necessary taxes and other costs. When you work for a compliant PAYE umbrella company, you are classified as an employee, meaning you are entitled to statutory employment rights, such as holiday pay, sick pay, and maternity/paternity leave.
The umbrella company invoices the agency at the agreed contract rate, which is higher than the contractor’s take-home salary. Before processing the payment to the contractor, the umbrella company deducts its administration fee (margin), Employer’s National Insurance (NI), and, if applicable, the Apprenticeship Levy. These deductions are necessary to cover the company’s costs and ensure compliance with tax and employment regulations.
The remaining amount is then processed through PAYE, where deductions for Income Tax, Employee National Insurance (NI), and pension contributions (if the contractor is enrolled) are applied. Once all deductions are made, the contractor receives their net salary. It’s important to note that umbrella companies do not source work for contractors; their role is solely to manage payroll and employment administration, ensuring compliance with tax and employment regulations.
IR35 and Umbrella Companies
The tax laws on agency workers and off-payroll working (IR35) do not apply to individuals working under a genuineumbrella company. This is because, as an umbrella employee, you are already taxed via PAYE and receive employee rights, making IR35 irrelevant to your tax status.
Getting paid
Who…?
The umbrella company pays you since they are your employer. They will pay you for the work you complete for the employment agency’s clients, deduct any PAYE (Pay As You Earn) income tax and employee national insurance contributions due from your pay.
How…?
The agency receives payment from the client for your services.
The agency deducts a charge for placing you with the customer and pays the remaining funds to the umbrella company.
This rate differs from the rate you receive from the umbrella company due to the umbrella company’s additional costs. These costs include administration costs, employer National Insurance, employer workplace pension contributions, holiday pay, and other amounts to cover other specific costs, such as the Apprenticeship Levy.
The agency’s payment to the umbrella company must cover the cost of the employer’s National Insurance contributions. This money will be used by the umbrella firm to pay employer contributions rather than deducting them from your gross income.
What…?
Your contract rate, as well as the rate you receive from the umbrella firm, should be included in your employment contract. It’ll usually be an hourly rate at the National Minimum Wage plus a taxable sum that’s referred to as a bonus or extra pay. This is your take-home money (your pay before deductions).
Your umbrella company may be including you in a tax avoidance scheme if any of this amount is labelled as non-taxable.
If the Umbrella company offers expenses (*Subject to SDC) they will do so in one of two ways: by assisting you in filling out a P87 (Claim Income Tax Relief for Your Employment Expenses) at the end of the year, or by agreeing on an amount of claimable expenses with your umbrella company at the start of your contract.
PAYE deducts Income Tax and employee National Insurance contributions, as well as any additional deductions like workplace pension contributions, from your gross salary. The remainder is the amount you take home.
Other considerations
Employer’s National Insurance contributions cannot be deducted from your gross pay by an umbrella company. Contact your employer (the umbrella company) if you believe your employer’s National Insurance contributions were deducted incorrectly from your gross salary.
Other contract management tools are available from some umbrella firms. They claim to be entirely compliant with HMRC and to avoid the problems of IR35, however we advise staying away from EBTs, offshore companies, and loan schemes.
Working overseas might be a challenging decision; yet, several umbrella companies have an International arm. The answers will be diverse and will differ from one country to the next.
We made them happy
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After contracting in the UK for some time, I was offered a great contract opportunity overseas. The thought of having to sort out paying taxes in another country as well the UK was a real headache. Crystal Choice was a huge help in putting me in touch with experienced international umbrella companies who could deal with my contract and tax payments easily.
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