For those looking to venture into contracting, an umbrella company is a popular alternative to working either as a limited company director or a sole trader.
Many first-time contractors view this option as the easiest way to go, while some are guided towards umbrellas by their recruitment agency – without really knowing too much about it. To help clear things up, we’ve created this handy guide.
What is an umbrella company?
Umbrella companies serve as the intermediary between contractors and end clients (either an employer or an agency). Once you register with an umbrella company, you will become an employee of the umbrella company and will receive a contract of employment.
The umbrella company will invoice the agency for the work you complete as their employee and pay you.
How does an umbrella company work?
Working under an umbrella company is simple:
You become an employee of the umbrella company
Once you’ve secured your role, the umbrella company will sign a contract for services with the recruitment agency or end hirer. You will sign a contract of employment with this umbrella company.
Calculate your hours
You will likely need to complete a timesheet at the end of each week or month and submit it to your end hirer for approval. Once approved, you may also need to submit this timesheet to both your recruitment agency and umbrella company. This will detail how many hours you have worked.
The umbrella company bills the agency
The umbrella company will invoice the agency, who will then bill the end client.
You get paid
You will then be paid a salary for the hours you have worked, minus deductions for taxes and the margin the umbrella company retains. You will receive a payslip which outlines all deductions and your take home pay.
Why use an umbrella company?
Working under a compliant umbrella solution gives contractors the best of both worlds:
Employees are given the flexibility to work on assignments, whilst still enjoying the same benefits and protections that employees enjoy. Some of these benefits include guaranteed hours of work, holiday pay, sick pay, maternity or paternity pay and access to a workplace pension.
You won’t be out of pocket as you will be able to claim legitimate business costs and expenses (as long as they’re incurred during an assignment). The types of costs and expenses that can be claimed and reimbursed are dependent on the type of assignment you’re working on and whether it’s subject to supervision, direction or control (SDC).
IR35 doesn’t apply
There’s no need to worry about the IR35 status of your assignment. As the employee of an umbrella company, IR35 won’t apply.
Find out more about the benefits of being an employee of an umbrella company.
How do umbrella companies calculate your take home pay?
For employees working under an umbrella company, pay will be subject to deductions for Income Tax and National Insurance through the PAYE system. This means that all Income Tax and National Insurance obligations will be paid on your behalf, as with any other employee.
There are a number of factors which will impact your take home pay, such as:
- Assignment rate
- Umbrella margin
- Income tax
- Employees’ National Insurance
- Employers’ National Insurance
For a more detailed estimation of your earnings, give our take home pay calculator a try.
Since 2000, Parasol has worked with contractors, providing support and advice. This experience has helped us ensure we always provide the best service possible. To find out more about how umbrella companies work or how we can help you, request a callback and we’ll be in touch.