What is an Umbrella Company?

An umbrella company serves as the intermediary between a contractor and an end client or recruitment agency. Umbrella companies employ contractors working on temporary assignments and invoice the client for the work carried out.

As the employer they also handle payroll, which means an umbrella company will pay employers’ NI and apprenticeship levy which will be paid from the invoice value. The umbrella company will also deduct PAYE costs like, Income Tax and National Insurance contributions before paying the worker. Therefore, umbrella workers don’t need to worry about calculating and paying tax to HMRC, as they would when self-employed. Everything is taken care of by their employer - the umbrella company.

How does PAYE work?

How does an umbrella company work in practice?

Here are the steps you will take if you join an umbrella company:

1. Once you have secured a new contract, the umbrella company (as your ‘employer’) signs a contract with your recruitment agency.

2. You will also sign a contract of employment with the umbrella.

3. Once you have completed a pre-agreed time period on site, you complete a timesheet and pass it on to your manager to sign.

4. Submit your timesheet to both your recruitment agency and umbrella, showing how many hours you worked that week/month.

5. The umbrella company will invoice the recruitment agency, which subsequently bills the end client.

6. Once the umbrella company receives payment from the agency, they can prepare your payroll.

7. Your umbrella will process your payroll and pay you a salary, following deductions for employment taxes, the pre-agreed umbrella margin, personal taxes, and pension contributions.

8. You will be issued with a payslip which details all of these deductions and your net take home pay.

What are the benefits?

• It’s one of the most hassle free ways to work as you can be set up with an umbrella company in a matter of minutes.

• Umbrella companies are ideal for both short and long term contracts or if you are new to the world of contracting.

• Staying with the same umbrella company gives you continuous employment which is important when applying for mortgages.

• There are no unexpected tax bills as your umbrella company makes all the necessary PAYE and NI deductions for HMRC.