What is an umbrella company?
Simply put, contractors use umbrella payroll companies to act as a traditional employer would: managing payroll, PAYE, chasing client payments, dealing with expenses and HMRC. Umbrella companies are ideal for contractors who don’t want the hassle of running a limited company and want an intermediary between themselves and their client.
Being paid by an umbrella company isn’t for every contractor but there are definitely benefits to streamlining your business in this way, particularly if you fall inside IR35 legislation. The benefits of receiving umbrella payments mean that instead of invoicing the client directly, you simply submit a timesheet to your umbrella
There are countless contractor umbrella companies to choose from, and their claims can sometimes be confusing. Some companies will also claim to be IR35 compliant, which is another impressive-sounding but meaningless credential – contractor payments are processed under PAYE and, as their contractors are registered as employed, they faII outside IR35 restrictions.
Every umbrella scheme featured here has been selected for its transparency and clarity of purpose so you can select the best service for you.
Frequently asked questions
Why use an umbrella company?
There are compelling reasons to use an umbrella company but whether or not joining one is right for you will depend entirely on how you intend to run your business and how much money you anticipate making.
Plenty of contractors would argue that working with an umbrella company makes particular sense for contractors who are just starting out. The virtue of an umbrella company versus a limited company is that it takes care of the administrative side of your work, leaving you to concentrate on finding gigs and building your business. You will take home less than you would if you ran a limited company, but your administrative workload is greatly diminished and if you stand to earn less than £25,000 or plan to work under several short term agency contracts, then forming a limited company might be more trouble than it’s worth. Working with an umbrella company allows you to trial contracting to see if it’s a life that you enjoy. Setting up a limited company will mean you’re still liable for expenses like employer’s liability insurance and pension payments, even if you decide contracting isn’t for you.
If you choose to work with an umbrella company in the UK, you will be paying both employee and employer’s National Insurance as well as an administrative fee. Being classed as a employee means that you get the protections and benefits afforded to them under the law. This means you’ll get things like holiday pay, redundancy and unfair dismissal rights and childcare vouchers. Paying that additional employer’s NI alongside employee NIC might sting but umbrella companies can save you money in other areas. An example of this might be allowing a salary sacrifice that results in a national insurance exemption on travel incurred by your work.
There’s also a distinct advantage to being on an umbrella payroll if you plan to use several contractor agencies at once. It can be very easy for agencies to keep you on their books even if you’ve decided to accept work through a different company. This can result in your wages being classed as income from a second job, resulting in you having to pay a 20% on the pound tax rate. Using a contractor umbrella company means that you’ll automatically avoid administrative pitfalls like this because you’ll be kept on a consistent tax code.
How do umbrella companies work?
An umbrella company functions like a traditional employer and acts as an intermediary between you and an employment agency. If you acquire a job through an agency, a UK umbrella company will sign a business-to-business contract with that agency and you will sign a contract with the umbrella company, making you their employee in the eyes of the law. Many agencies have relationships with particular umbrella companies and will encourage a contractor to use the one with whom they’re affiliated. But there’s no need to be swayed – do your research so you can get the best umbrella services for your needs.
As you embark on your new contract work, you will have to fill out and submit a timesheet to the umbrella company who will then bill the client on your behalf. You should also submit any expenses that you wish to claim, making sure to retain all your receipts. Umbrella companies don’t always ask for proof of your expenses but if HMRC should need to investigate, they look at the contractor, not the umbrella company, so don’t throw anything away! There are very specific laws detailing exactly what a contractor can claim on expenses, particularly when it comes to food and travel, and what is allowable is dependent on whether or not your contract is under the Supervision Direction and Control (SDC) of your client. You will need to clarify your expense allowance with your umbrella company before you begin your assignment.
When you receive your pay, it’ll be on a regular schedule through a PAYE contract, with tax and national insurance deducted, along with a fee from the umbrella agency. There is no need to engage an accountant as all your taxation issues should be dealt with by the umbrella payroll company and you should receive P60 and P11D forms at the end of the financial year. If you have any additional expenses you can also claim them against your income tax at the end of the year.
Be mindful of the small print – the introduction of AWR (Agency Worker Regulations) mean that if you are working with an unscrupulous umbrella scheme, you could find unexplained (and unlawful) deductions or low start up fees that escalate after a few months. Don’t be afraid to query your umbrella pay if you don’t understand the reason for a fee.
Download our Guide to Umbrella Companies
Wondering whether to set up with an umbrella company? It's a good idea to make this decision before you start work. We've put together a guide to help you make this decision when starting life as a freelancer, a contractor, or both.
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