Why to avoid being employed under an Umbrella Company
In most of the cases working under an Umbrella Company means to work through an Agency that will send you to work for a specific company, on their name.
The salary will be paid through an Accounting Company which will also be the legal employer.
The Agency is not interested to hire with a contract because this will make the agency pay not only the daily/weekly/yearly payments but also holiday and national bank holidays, plus any financial compensation if they reduce the personal.
To avoid all this disadvantages of hiring somebody with a contract, the Agency will arrange with an Accounting Company is working with, to hire the workers.
As a result of this trick, the Agency will send people to work once the hourly rate offered is accepted by the potential worker.
Where the money of a person employed under an Umbrella Company go first
The weekly or monthly salary will be paid in full to the employer which, in this situation, without to much logic is the Accounting Company.
The Accounting Company which is the employer, will receive the gross salary of the employee person, registering it as it’s own income from which will pay:
- its own government taxes
- the employee taxes
- the employee holiday (weekly / monthly quota)
- its own commission because is paying the employee and his taxes
- deductions for Apprenticeship Levy (a levy for UK employers to fund new apprenticeships)
As a result, the employee will bring the money negotiated with the Agency, to the Accounting Company (the actual employer) which will make profit without to much effort or implication.
The money are split between the employee, the Agency and the legal employer, (a third party company which is the Accounting Company) and the employee is basically paying commission to the employer for the money is bringing into the company.
How to avoid this problems generated by an Umbrella Company
All this problems generated by the work under an Umbrella Company can be solved by being a Self employer and work on your name or through an agency/company which will find work for you and will keep 20% taxes. At the end of financial year when you will do your tax return, as a Self employer, you will have to pay the Nation Insurance Number (NINO). If you don’t know how to pay tax return, have a look at Taxfiler (link here)
A second solution to this problem is to create your own company, be the only employee, and work in this way for an agency or a different company. You will register the gross income and at the end of financial year you will pay all the taxes and National Insurance Number (NINO)
Who is usually affected by this Umbrella Company system
To work under an Umbrella Company is a choice usually done by people in different situations: which do not have minimal knowledge about how to become a Self employer or how to open their own company (usually immigrants that want to avoid illegal employment); or they are unable to become a Self employer or to be the director of a company registered on their name; or they are new to contracting and they are looking to get a feel about how it is to be a Self employer and decide to work for an Umbrella Company for a while. In most of the cases somebody (as the owner of the Accounting Company mentioned above) is earning money from the back of this people, without to much effort.