Danbro umbrella

Glossary

Take a look below to find out more about some of the key terms and phrases surrounding umbrella company employment.

Umbrella contractor solutions

With agency PAYE (Pay As You Earn), a contractor gets employed by their employment/recruitment agency for the duration of the contract they have with their end client. They’re paid direct, through the agency’s payroll. Unlike the continuity of employment between contracts that umbrella companies provide, an agency PAYE worker’s employment ends when their contract with their client finishes. What’s more, agencies tend to offer lower rates to their own PAYE workers. That’s in contrast to the often uplifted rates offered to contractors employed by umbrella companies.

The Apprenticeship Levy came into force in April 2017. It means that all companies whose annual wage bill exceeds £3m are expected to pay a percentage of their payroll costs to HMRC. That money is then earmarked for the training of apprentices. The idea being that those employers who commit to training will be able to get back more than they put in by training sufficient numbers of apprentices.

The Apprenticeship Levy is payable through PAYE. It’s to be paid alongside Income Tax and National Insurance contributions and will show as a company deduction on your reconciliation sheet. Each employer (including those operating multiple payrolls) receives an annual allowance of £15,000, which they offset against their levy payment.

As a contractor, you may have multiple end-clients, with contracts running simultaneously. But with an umbrella company, you’ll only ever have one employer. Your contract will persist even when looking for a new assignment. As an employee, continuity of employment will make it easier to get credit or apply for mortgages.

All employers are legally obliged to pay Employer’s National Insurance to HMRC. Along with other deductions, Employer’s NI, must be paid to HMRC by whomever establishes themselves as your employer. So, under our employment umbrella, you’re our employee. Therefore, we bear the cost of employment.

What this means in practice is that the rate you’re paid for your assignment gets uplifted. This is to account for costs such as tax and Employer’s NI, etc. So, the money you take-home is similar to what a permanent employee would earn for the same job. What’s more, all the deductions required by law have been compliantly taken.

Your payslip should clearly outline any deductions, including Employer’s NI. With us, your take-home pay is completely transparent, with no hidden fees. Hence the importance of selecting a consistent and compliant umbrella provide.

IR35 is a tax law that targets disguised employment.

Disguised employees are those who falsely position themselves as limited company contractors. They often do this to pay less tax, something HMRC sees as tax avoidance. HMRC introduced IR35 to help decide whether contractors are working through their limited companies correctly. The legislation tends to concern freelancers and contractors who provide their services via Personal Service Companies (PSCs).

Loan schemes are often referred to as ‘disguised remuneration’ schemes. They’re tax avoidance arrangements which are used by some people to avoid paying Income Tax and NICs.

Scheme users get paid their income in the form of loans. However, these loans are not intended to be repaid, and therefore ought to be taxable. HMRC has always maintained that loan schemes do not work.

A Personal Allowance is the amount of income you’re allowed to earn before you start paying tax. The standard amount currently (as per the 2019/20 tax year) stands at £12,500.

According to HMRC, if you claim things like ‘Marriage’ or ‘Blind Person’s’ Allowance, your Personal Allowance may be bigger. Likewise, it’s smaller if your income is above £100,000.

To learn more about Income Tax rates and Personal Allowances, click here.

Many contractors provide services to clients via their own limited companies. In tax talk, this is often referred to as a Personal Service Company, or PSC.

A PSC is generally defined as a limited company with a sole director – the contractor. That person owns all – or the majority of – the shares. PSCs provide professional services delivered by an individual, direct to a client, or via an agency.

An overarching contract is a special type of employment contract. It links together a series of separate assignments. Under this agreement, temporary workers become employees of the employment business.

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