How does a PAYE Umbrella work?

13 March 2017 5

With a PAYE umbrella company you become an employee of the company. Each week or month you instruct them to invoice the agency/client based on your time sheet. They then pay you a net salary after deducting national insurance contributions and income tax on all your earnings.

After securing a contract you instruct your agent to send a contract to the umbrella company for signing. You do not sign the contract yourself. Instead there will be a contract in place between you and the umbrella company.

Joining an umbrella scheme is very quick. If you do not currently have one then you can wait until you have a firm offer before deciding which one to join. In any case, you should have your contract reviewed for IR35 before deciding which payment structure to use.

The IR35 legislation is used to determine whether you are considered a ‘deemed employee’ for tax purposes. Your IR35 status for each contract will either be ‘inside IR35’ or ‘outside IR35’ and depends on your contract and working arrangements with each of your clients.

In the 2007 Budget the Managed Service Company Legislation was introduced, which effectively put at end to 'composite umbrella companies'. Composite schemes were effective for contractors outside the IR35 legislation, since all income could be taken as a combination of salary and dividends. Now however, the only viable umbrella option is the PAYE Umbrella, where all income is paid via PAYE.

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