Is it fair to assume that we all know what an umbrella company is and why people use them? Well in a word; no. Although umbrella companies are not a new phenomenon and have been around for many years; it is only since the 2007 budget and the subsequent legislation that they have really come to the fore.
Gone are the days of the composite company; basically a limited company that you would be placed in as a shareholder with perhaps another 20 people. You would then claim the minimum wage, and the rest of your take home pay would be in the form of dividends. These ceased in 2003 when the government introduced a tax-free allowance of £10k for small businesses, and single person limited companies were born.
Really, these single person companies were, to all intents and purposes, the same as composite ones except that a single person owned all of the shares. These single person companies were very popular during this period. In fact so much so that new legislation was introduced in the 2007 budget in order to shut them down. These new laws saw the end of wage payments as dividends and the start of more complicated payment methods the most widely used of which was the umbrella company.
With an umbrella company you will still pay PAYE tax as well as National Insurance, however, you are able to claim all legitimate business expenses. The main difference between this new form of company and the old composite companies and single person companies is that the umbrella company does not pay salaries in the form of dividends as to do so would be illegal under the new legislation.
Finally – we should bear in that there are many other advantages to using umbrella companies that go beyond the mere financial; for example, they negate the need to be involved with running a spreadsheet, VAT returns, payroll matters, company accounts, taxation and so on. This in itself is a good enough reason for many companies and individuals to use them.
