Contracting Under An Umbrella Company
An Umbrella service or company acts as a in-between for your contracting services. Essentially you enter into a contract with the Umbrella company that makes you a PAYE employee. Your end client or representing agent then also enters into a contract with the Umbrella for your services, they pay the Umbrella Company which then pays you as an employee.
Benefits Of Using An Umbrella Company
For the cautious contractor an Umbrella Company is very easy to use, all tax and NI is deducted before you get paid, you are a PAYE employee. You need do nothing more than send send in timesheets and expense claims and wait to be paid by the Umbrella.
The Downsides Of Using An Umbrella Company
With simplicity comes expense, unfortunately operating under an Umbrella Company is the most expensive way of working in terms of both income Tax and NI.
Employee Benefit Trusts
With an EBT Scheme you are the employee of an offshore company and will pay normal UK P.A.Y.E. on your income from the company. The salary offered will usually be much less (hence less Tax and NI) than the amount the offshore company receives from the invoices for your services whilst contracting. In being the employee of the offshore company you are eligible to participate in the Employee Benefit Trust which makes payments to company employees, this is quite legitimate and is seen as a way of rewarding key staff. EBT payments are based on the profit the company has generated from employing you - effectively this is the difference between the amount invoiced for your services whilst contracting and the cost of employing you (your basic salary). For legal reasons to remain free from taxation these payments from the Employee Benefit Trust cannot be guaranteed. This is where the risk with EBT schemes is.
The EBT route has been in use for many years during which there have been several changes in legislation attempting to block this option but many of the offshore companies that offer an Employee Benefit Trust scheme have modified their procedures to remain within the law. It is still essential to review the legal opinion of any company offering an EBT pay scheme for contractors.