People who have ditched salaried employment in favour of self-employment often feel elated when they secure their first contract. This is the point at which the recruitment agency that sourced the placement may advise you to join a PAYE umbrella firm.
Although the option may not suit everyone, there are some very sound reasons why finding a good PAYE umbrella firm will yield highly beneficial outcomes for many freelancers. For one thing, you will be spared the hours of paperwork involved in managing your invoices, expenses, tax and national insurance contributions. Umbrella companies are effectively payroll outsourcing agencies and, for a modest fee, they free contractors to get on with earning money by relieving them of all the financial paperwork associated with self-employment.
They will raise invoices on behalf of their contractors, accurately recording the hours and days worked. When they receive payment from the agency or client you have worked for, they deduct tax and national insurance before paying you. What you receive in your bank account is all yours. You will receive a payslip detailing the deductions and payments. An efficient PAYE umbrella firm will also process all the business expenses you are entitled to.
By choosing a PAYE umbrella firm, you place yourself on agency payroll, which means that you are also safely beyond the scope of IR35 investigations for ‘disguised employment’. HMRC considers you an employee because tax and national insurance are deducted and sent to the Inland Revenue on a PAYE basis, even though you remain free to claim business expenses.