What is an Umbrella Company?

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In recent years, the number of people searching for more freedom and flexibility in their work has grown to record levels. This change in the way people work has seen the UK’s self-employed population grow to 4.3m and also contributed to the popularity of umbrella companies.

As the number of people operating through an umbrella company continues to soar, so have the questions that are asked about this way of working. From ‘what is an umbrella company?’ and ‘why become an umbrella employee?’ to ‘how do umbrella companies work?’, the questions put to our experts here at Parasol are wide-ranging.

Fortunately, these questions are easily answered. So in this guide to umbrella working, we’ll explain what an umbrella company is, how they work in practice along with any other need-to-know information.

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 do umbrella companies work?

It’s simple - we’ll explain the process in four easily understood steps.

Become an umbrella employee - Once you’ve landed a contract (usually through a recruitment agency), you become an employee of the umbrella, signing a contract of employment.

Calculate your hours - In most scenarios, you will be asked to complete a timesheet every week or month, which your end client will sign off. You might also be asked to submit this to your agency and umbrella too, so they know how much to pay you.

Umbrella bills agency - The umbrella will then invoice the agency, who bills the end client who you’ve carried out the work for.

Get paid - The umbrella company will deduct their margin, employers’ NI, apprenticeship levy and employers’ auto enrolment pension contributions from the invoice value to arrive at your gross pay figure. This gross pay will be subject to the usual deductions for PAYE tax and NIC. All taxes and charges will be outlined on your payslip.

When - if at all - does IR35 come into the picture?

It doesn’t, you’ll be glad to learn. IR35 isn’t a consideration for umbrella workers, with this legislation only impacting contractors who operate through Personal Service Companies (PSCs).

This is one of the many advantages of umbrella companies, along with employment rights, continuity of employment and overall convenience.

Do umbrella workers receive employment rights?

Yes. Because you’re engaged in a contract of employment, you’ll be entitled to the usual employment rights and protections. This includes; sick pay, paid maternity and paternity leave.

How do umbrella companies work out your take home pay?

Just like an employee, your pay will be subject to Income Tax and National Insurance deductions. How an umbrella company calculates exactly how much you take home after tax hinges on a number of factors:

  • The assignment rate
  • The umbrella margin (the amount the umbrella retains from the invoice value)
  • Whether you make contributions into a private pension
  • Income Tax band
  • Employee’s National Insurance rate
  • Employers’ National Insurance rate

To find out how much you stand to take home when working through an umbrella company, why not try our take home pay calculator?

Why Parasol?

Since 2000, Parasol has supported contractors with compliant and trusted umbrella services. For more information and to speak to one of our experts, please request a callback and we’ll be in touch.