What is an Umbrella Company?
An Umbrella Company acts as an employer for contractors on a fixed term contract, with their principal responsibility to arrange payment for the work carried out and to ensure all relevant employment taxes are deducted. The worker has a contract of employment with the Umbrella Company and is paid as an employee, receiving a payslip each time they are paid.
Using an umbrella company is the main alternative to setting up your own limited company, the main difference being the way that you are paid. Through an Umbrella Company you are treated as an employee, but still enjoy the benefits of being able to move between contracts freely.
How does an Umbrella Company work?
The Umbrella Company is responsible for all administration such as invoicing and payments. They are also responsible for making sure your tax obligations are paid. These taxes are deducted at source and paid to you net so there is no tax bill to pay at the end of the year. These taxes also include Employers PRSI, but this cost will be considered in the rate offered by the Client / Agency compared to that of a direct employee in the same role.
There will be a contract in place between the Umbrella Company and the Client / Agency for the services provided. The contractor simply gets a timesheet signed by their manager and send their timesheets and expenses to their account manager at the Umbrella Company. Once payment is received from the Client / Agency, the payslip will be processed and payment will be made directly to the contractor.
You will also be fully covered by the insurance of the Umbrella Company and will have access to company incentives such as the company pension scheme or cycle to work scheme.
Advantages of Using an Umbrella Company
Maintain PRSI class A contributions
Retain your PAYE credit
Lower cost than Limited Company
Guaranteed tax compliant
Minimal administration burden
More flexible than direct employment
Tax incentive schemes are available
Assistance with mortgage applications
Disadvantages (against Limited Company option)
Employers PRSI is deducted at source from earnings
Restricted pension options