If you’re a contractor or freelancer entering the workforce, you might be interested in working with an umbrella company.
However, umbrella companies can be confusing, and you might not know exactly how they work. We’ve got you covered. Read on to learn all about umbrella companies and how they work.
What is an Umbrella Company?
Umbrella companies employ those contractors working on temporary contract assignments. Your agency will pay an umbrella company, which then pays you through something called PAYE (pay-as-you-earn).
Umbrella companies will treat you as if you’re a full-time employee. Ultimately, it’s a company that self-employed contractors can join. They will take care of payroll services for contractors, handling tax and National Insurance contributions through PAYE.
Similar to regular agency jobs, you will get a payslip and reconciliation sheet, which will include details about your wage.
So, umbrella companies handle:
- VAT returns
- Company records
- Payroll
Contractor umbrella companies have been around for over 20 years, and before they ever existed, most freelancers would usually work through their own limited company.
Now, 20+ years on, it’s believed that there are over 700,000 contractors and freelancers in the UK that are paid through umbrella companies.
How Umbrella Companies Work
As we’ve established, umbrella companies act as the middleman between contractors and their recruitment agency (or client). Here’s a simple step-by-step guide to how umbrella companies work:
- Contractors sign a contract of employment with the umbrella company to become an employee
- The contractor will then complete their work assignments through their agency as normal
- The umbrella company will charge/invoice the agency for the work
- The umbrella company will process the payroll and deduct relevant taxes/ NI contributions
- The contractor will be paid for their work through PAYE
Benefits of Using an Umbrella Company
If limited company contracting isn’t an option and your agency or end client prefers to outsource their payroll, then using an umbrella company could be a great route to go down. Here are some of the key benefits of using an umbrella company:
No Commitment
The beauty of an umbrella company is that there’s zero commitment. You’ll be glad to know that you don’t need to worry about signing any long contracts. Umbrella companies are great if you change your mind about things and want to go back to regular employment at the end of your contract.
Pay
Some, but not all, umbrella companies provide additional employee benefits. Payslips are always sent out to those who are working under an umbrella company, but some choose to go that extra mile.
Statutory sick pay, holiday, maternity and paternity pay are all on the list of added bonuses when you’re an employee at an umbrella company.
If you didn’t think that was enough, some companies also offer professional liability insurance, which makes you feel even more comfortable within the workplace.
Umbrella Company FAQs
How Do I Choose an Umbrella Company?
To find the right umbrella company for you and your needs, browse various comparison sites and directories. When you’ve chosen a decent candidate, be sure to look at reviews and testimonials/endorsements where possible.
Make sure they have accreditations – these show that they’ve been audited by high-industry experts. Finally, look out for the fee structure – for example, whether it’s a fixed fee or a percentage fee. Be sure to check out if they have any signing-up fees or early exit fees.
What Details Do I Need to Join an Umbrella Company?
You’ll need to provide certain information when you sign up with an umbrella company, such as:
- Your contract of employment
- P45
- Personal information (name, address, date of birth etc)
- Bank details
- Proof of ID
- Proof of right to work in the UK
Does it Cost to Work With an Umbrella Company?
Yes, in most cases, umbrella companies charge weekly fees. These fees can range from £15 to over £25, covering their costs and services.
Keli Evans, Director at LJS Accounting Services, excels in taxation and statutory accounts. With a focus on strong client relationships, she leads a diverse portfolio, overseeing vital financial aspects like VAT, payroll, pensions, and taxation with a holistic and committed approach.
