What is an Umbrella Company?

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

As the number of people operating through an umbrella company rises, 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 I start working through an umbrella company?’, the questions put to our experts here at Parasol are wide-ranging.

Fortunately, these questions are easily answered. In this guide to umbrella working, we’ll explain what an umbrella company is and how it works, how you start contracting through an umbrella company, along with some other need-to-know information.

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 deducted from the invoice value. The umbrella company will also deduct PAYE costs, like Income Tax and National Insurance Contributions before paying the worker. 

With this in mind, individuals contracting through an umbrella company 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 does an umbrella company 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 your chosen 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 expected 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, the 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.

How to set up through an umbrella company

So how do you set up or start working through an umbrella company? Are there any key steps to take or legal obligations to adhere to? 

In truth, it couldn’t be easier and unlike limited company contracting, you don’t need to form and register a limited company or open business bank accounts to begin. All you need to do to start contracting through an umbrella company is:

  • Choose your umbrella company (from your agency/end client’s preferred suppliers)
  • Agree and sign contractual terms
  • Provide your personal bank details (so you can be paid)
  • Get to work

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; holiday paysick 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
  • Employers’ National Insurance rate

To find out how much you stand to take home when working through an umbrella company, why not get a personalised take-home pay calculation?

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