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How does a PAYE umbrella company work?
Posted Feb 20, 2012
In this article, we look at how the typical PAYE umbrella company works in practice, and what to expect when you sign up to a new scheme.
How does an PAYE umbrella company work?
Once you have chosen an umbrella company which suits your needs (the most important task), these are the typical first steps you will take as an umbrella company employee:
You will become an 'employee' of the umbrella company. You need to provide your P45 or P46 form to get started together with administrative details such as your National Insurance number, bank account and personal details.
Once you find a contract role, your PAYE umbrella firm will sign a contract with the recruitment agency. You will also sign a contract of employment with the umbrella company.
Timesheets and Invoicing
Each week or month, you will submit your timesheet details to your umbrella company. This is typically done online.
The umbrella will then submit an invoice to your agency on your behalf. The agency will then pay the umbrella for the invoiced sum. Check with your umbrella how often the make payments, as some make payments the same day they receive funds, others may only pay once per month.
At the pre-agreed time in your cycle, the umbrella will pay you directly into your bank account. You should receive your invoice amount minus income tax (PAYE), National Insurance Contributions (NICs), the umbrella fees, and any other deductions you have pre-agreed.
Depending on the arrangement you have in place with the umbrella scheme, you will be paid via BACS, Faster Payments (FP) or CHAPS. Check with your account manager to see if there are any extra charges for using the same-day method (CHAPS). With most banks signed up to FP, the days when you would have to wait several days to receive cleared funds are more or less over.
During your time with the umbrella, you will also be able to submit expenses claims for pre-agreed items.
You can only claim for expenses which have been wholely incurred in the conduct of your contract work. You should also read our guide to expenses dispensations, via which HMRC will permit an umbrella company to process certain expense payments at a flat rate, without the need for receipts.
Before you sign up!
With so many PAYE umbrella companies in the market, you should always spend time on research before signing up. The main difference between firms lies in the fees they charge, and the customer service experience (which is harder to quantify). Aside from the umbrella's fee, there should be no difference in way net take home pay is calculated between PAYE umbrella companies.
Make sure you read our 15-point guide to comparing umbrella companies.
Also try our growing list of UK contractor umbrella companies.