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Umbrella companies’ solutions provide contractors with an alternative trading solution to running their own limited company or working self-employed as a sole trader. Many contractors use them to avoid IR35 tax issues, because umbrella companies typically provide contractors with an employment contract. The umbrella is a limited company in its own right and usually employs from hundreds up to thousands of contractors. Rather than the contractor's own limited company contracting with an agency or client, the legal relationship is between the umbrella company and the agency or client. The umbrella invoices the client or agency, collects payment and then pays the contractor net of the umbrella company's fees, which can be anything upwards of £10 per week for each contractor. Umbrella companies - how they work: Contractors find using an umbrella company simple. Once the contractor has signed up, which can often be done online and over the telephone, and negotiated their contract with the agency or client, they hand over responsibility to the umbrella company's management team. The umbrella company will get the contract paperwork signed by both parties, so the contractor can start work secure in the knowledge a contract is in place. Then each week, or month, the contractor completes a timesheet for the client to authorize before forwarding it to the umbrella company online, by fax or post. The contractor umbrella company will invoice the agency or client for the correct amount, chasing for payment if necessary. Once the umbrella company has been paid, it will pay the contractor a salary net of the umbrella company fees, income tax and National Insurance Contributions, which the umbrella company pays direct to HMRC. Because the contractor can claim travel and subsistence expenses, they pay less tax and take home more of their gross fees. Thus, contractor umbrella companies are a popular trading solution for many contractors, particularly those caught inside IR35.
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