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 what an umbrella company is, how umbrella pay works, and the pros and cons of joining one.
What is an Umbrella Company?
Umbrella companies employ contractors working on temporary or fixed-term assignments. Your agency or end client will pay the umbrella company, which then pays you through PAYE (Pay As You Earn).
In simple terms, an umbrella company acts as your official employer. You complete your work as a contractor, but your pay is processed as though you are a permanent employee. This means:
- Tax and National Insurance are deducted automatically
- You receive a payslip for every pay cycle
- You may get access to statutory employment rights, such as holiday pay and sick pay
Umbrella companies also handle:
- Payroll administration
- HMRC reporting
- Employee contributions
- Insurance (sometimes included)
Umbrella contracting has been widely used for more than 20 years. Today, it’s estimated that over 700,000 freelancers and contractors in the UK are paid through umbrella companies.
How Do 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:
- The contractor signs an employment contract with the umbrella company
- The contractor completes assignments for their client or agency
- The umbrella company invoices the agency or client for the work
- The umbrella company processes payroll and deducts tax/NI contributions
- The contractor receives payment through PAYE
This process is often referred to as umbrella pay – where your gross earnings are reduced by tax, National Insurance, pension contributions (if opted in), and the umbrella company’s margin or fee before you receive your net pay.
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. Here are some of the main benefits:
No Long-Term 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.
Employee Rights and Benefits
Some umbrella companies provide additional employment rights and perks. At minimum, you’ll always receive a payslip, but many umbrella companies also offer:
- Statutory sick pay
- Holiday pay
- Maternity and paternity pay
- Access to pension auto-enrolment
- Optional insurance such as professional liability cover
Umbrella Company vs Limited Company
| Factor | Umbrella Company | Limited Company |
|---|---|---|
| Set-up | Quick and simple | More admin and setup required |
| Pay | Processed via PAYE | Draw salary + dividends |
| Admin | Minimal, handled by umbrella | High, requires bookkeeping & tax returns |
| Flexibility | Great for short contracts | Best for long-term contracting |
| Benefits | Employee rights (holiday, sick pay, pension) | No employee rights |
Simplify Your Contracting Journey With LJS Accounting Services
If you’re a contractor or freelancer looking for a hassle-free way to get paid, working with an umbrella company could be the perfect solution. Compare umbrella companies, calculate your potential take-home pay, and choose the right one for your needs today.
Explore our personal tax services today to get started.
Umbrella Company FAQs
Here, we answer some frequently asked questions about umbrella companies:
How Do I Choose an Umbrella Company?
To find the right umbrella company for you, browse comparison sites and directories. Check reviews and testimonials where possible.
Look out for:
- Accreditations (demonstrating compliance with industry standards)
- Whether fees are fixed or percentage-based
- Hidden costs such as sign-up or 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 or monthly fees. These typically range from £15 to £30. The fee is deducted before you receive your net pay, so you won’t need to make separate payments.
Some umbrella companies also offer a “take-home pay calculator” so you can estimate how much you’ll receive after tax and deductions.
What is Umbrella Pay?
Umbrella pay refers to the process of being paid via an umbrella company. Your gross contract earnings are subject to deductions including:
- Income tax
- National Insurance contributions
- Pension contributions (if enrolled)
- The umbrella company’s margin
The remaining amount is your net take-home pay.
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.
