The two most common trading methods used by the temporary workers are Personal Service Company popularly known as PSC and umbrella company.
Before starting any assignment, it is important to decide which route you want to choose, i.e. to work through an umbrella company or to set up a PSC.
Usually, temporary workers have a choice to use the trading method they are comfortable with, however, in certain situations, there is a specific requirement from the client to go for the trading method of their choice – which is usually an umbrella company.
Let us give you a brief about both. PSC is basically a limited company formed to render services to the client. Here, you as an individual are the Director and the shareholder of the company. So when you are rendering your services to the client, it is deemed as one company is rendering services to another company.
Here, you are responsible for meeting your tax obligations, both personal as well as business, when working outside IR35.
In case your contract is deemed inside IR35, in the eyes of the law, you are seen as an employee working for an employer. This means you are subject to the taxes and National Insurance Contributions (NICs) of an employee.
On the other hand, it is completely the opposite when you choose to work through an umbrella company. In this case, the umbrella company becomes your employer and acts as an intermediary between you and the end client. The key benefit of working through an umbrella company is, that your taxes and National Insurance Contributions (NICs) are managed by the umbrella company and deducted before you are paid. Amidst all these, you still continue to enjoy the freedom of being a Contractor.
Working through an umbrella company and a PSC has its own unique benefits and challenges.
You should work through an umbrella company if you don’t want to go through the hassle of setting up your own company and managing the taxes and insurance contributions. As mentioned above in this article, the umbrella company takes care of it by deducting the necessary PAYE and National Insurance Contributions (NICs). You keep what you are paid by the umbrella company without worrying about anything else.
When compared to the PSC contractors working outside IR35, you might not be able to claim as many expenses as them, but still, there are some expenses you can claim. This is one point you should keep in mind.
You should however not trade through a PSC if you don’t want to go into the hassle of tax-related matters, as well as sending and sometimes chasing for invoices. This potentially distracts you from your core work. If you want to purely focus on your core work then probably an umbrella company is the way to go.
When working through an umbrella company, all you are required to do is fill and submit your timesheet and the rest will be taken care of by your umbrella company. This lets you focus on your core work.
The other benefit of working through an umbrella company is that you have access to employment rights. This includes holiday pay, statutory benefits like maternity or paternity pay and sick pay. To top it up, you are auto-enrolled in a workplace pensions scheme that proves handy when you retire.
Umbrella company works the best in the case of IR35. As an umbrella company employee, you don’t need to worry about IR35 since it doesn’t apply to the assignments since the contractors working inside IR35 are taxed like employees.
All in all, working through an umbrella company does offer temporary workers a hassle-free experience.