Why Recruitment Agencies Outsource Payroll Functions

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All businesses struggle from time to time with their financial and legal responsibilities and it’s easy for a lot of time to be spent in the important but mundane functions of administration. This time could be better spent in developing business opportunities and new income streams; instead of being engaged in paperwork employees could be making valuable contributions to a company’s growth.

A solution that is proving more and more popular with recruitment agencies is to outsource payroll, removing a large burden from the company’s administrative process whilst ensuring that contractors recruited get the financial and insurance services they need.


Umbrella companies and how they work

In essence, an umbrella company provides contractors with a payroll service. It processes the payroll and also legitimate business expenses to be set off against tax; this also eliminates the necessity of dealing with IR35 legislation – the tax authorities’ method of defining if a contractor is self-employed or acting as an employee to a business.

Acting as a middleman between contracting parties, an umbrella company collects all data that is relevant to contracts and processes it, ensuring that payment and tax issues are handled comprehensively and competently.

Benefits to recruitment agencies of effective payroll solutions

It’s not uncommon for smaller businesses in the field to look for added value to their mainstream operation. Many agencies will have employees who can handle the basics of payroll, but it takes time and most are unlikely to be experts in employment law and taxation. Using an umbrella company means that access to all those specialist resources to deal with payments is convenient but is still at arms length. The bureaucratic burden is therefore relieved and company employees can concentrate on what they do best, growing the business.

Additional benefits are that because an umbrella company is a specialist in taxation and payroll issues, it could help an agency to save money by knowing how business expenses can be balanced against taxation to bring down the overall tax bill. This is a particularly useful specialism because the laws on allowable business expenses can be very complicated at times, and having an expert to call upon means it is far less likely that HMRC will come knocking on the door requesting extra payments.

The umbrella company will also collect all appropriate data to make sure that contracts are fulfilled properly in terms of paying invoices and financial settlement.


Keeping it legal

In the world of employment law and taxation there are many grey areas that the majority of small businesses and contractors find hard to understand clearly. The last thing they need is to be taken to task – or even court – for doing something wrong and not complying with legislation. It’s a weight off the collective shoulders when payroll is outsourced in the knowledge that an umbrella company will be working to the contractor’s advantage, where money spent on outsourcing is money saved on the costs of employing in-house specialists to do the work.


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Managing your payroll online

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For many small businesses and contractors, one of the biggest administrative burdens is managing the payroll.  Large amounts of time can be spent on the payroll processes, when in business terms this time would be better invested in working with customers and developing commercial ideas.  For this reason alone, the payroll activity is frequently outsourced, but there are also other good reasons for managing the payroll online and through an external agency.

What an umbrella company does

One of the solutions that many contractors and entrepreneurs turn to in managing their payroll administration is an umbrella company.  The essence of an umbrella company is that it provides a payroll service to contractors by processing the payroll while enabling business expenses to be set against tax, and eliminating the need to deal with IR35 legislation. The umbrella company acts as an intermediary between contracting parties to collect all the relevant data in respect of the contracts, and to process this so that payment and taxation are competently and comprehensively handled.


The benefits of payroll solutions through an umbrella company

Contractors and small businesses that choose to handle payroll and contract invoicing through an umbrella company can glean a number of advantages.  The first of these is the general benefit that persuades many small businesses to outsource administrative components of their work. Namely, the umbrella company reduces the bureaucratic burden on a contractor or entrepreneur and frees time for operating and growing the business. Next, as a specialist in payroll and taxation issues, the umbrella company can potentially save the business money by effectively using valid taxation principles to balance expenses against taxation and reduce the overall tax bill.  In addition, the umbrella company, by gathering all the necessary data, ensures that contracts are properly fulfilled in terms of invoice payment and financial settlement.


Tips on choosing an umbrella company

After deciding to use an umbrella company, there are a few tips for contractors and entrepreneurs concerning what to look for when choosing the right umbrella company for their needs.  As with any business transaction, the primary means of assessing the suitability of an umbrella company lies in the clarity and level of fees to be charged.  Fees at any stage of the business relationship should be fully transparent and listed in detail, so that fair comparisons can be made between companies to ensure that there are no nasty surprises at any stage.  In addition, a track record that shows high levels of expertise and sound, wide-ranging experience is to be preferred. Full liability and indemnity insurance cover is also essential.


In addition to these more common sense points of comparison, it is also good to choose an umbrella company that provides a simple and personal online service.  The management of data online should be clear and easy, and it should be possible to contact a competent representative in person, if the need arises.  Furthermore, the umbrella company should be able to show that it operates procedures in expenses and taxation that are both transparent and comprehensive, in line with current tax requirements set out by HMRC.


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