In this guide, we will explain in simple terms what an umbrella company is and how it works. This is a must-read guide if you are new to umbrella companies.
Umbrella companies, in simple terms, are intermediaries (a third party) that acts as a critical bridge between you and the agency. The relationship between a contractor and an umbrella company is similar to an employer-employee relationship. When you receive a contract from an agency and opt to work through an umbrella company to provide your services to the end client, the umbrella company you appoint becomes your employer.
The umbrella company you choose will employ you, pay your salary (which they collect from the agency or end client), and process your timesheets. Essentially, you are on their payroll. In addition to this, they will deduct National Insurance, income tax, and pensions where applicable. There is typically a fee for these services, ranging from £80-£100 per month or anywhere from £10-£60 per week, which can vary significantly between companies. After these deductions and the umbrella company's fee, your net pay is what you will receive.
Umbrella companies have gained popularity particularly after the IR35 reforms took effect. They offer a simpler way to work without the complexities associated with IR35, although not entirely without challenges. This has led to an increase in the number of umbrella companies being established, providing more options for contractors but also increasing the risk of encountering fraudulent operators.
One benefit of working through an umbrella company is the potential to claim expenses, although eligibility depends on the nature of the assignment and whether it falls under the category of Supervision, Direction, or Control (SDC).
Under UK tax rules, expenses can typically be claimed if the contractor is not subject to SDC in the way they carry out their work. SDC refers to the degree of control or oversight that the client or agency has over the contractor's work. If the assignment involves a high level of SDC, then certain expenses may not be eligible for claim under HMRC guidelines.
Umbrella companies provide a comprehensive solution for contractors, handling administrative tasks and ensuring compliance with tax regulations. Here are the key aspects of how they operate:
| Advantages | Disadvantages |
|---|---|
| Easy to setup and use, and less administrative burden | Umbrella company fees reduce your take-home pay |
| Access to statutory employee benefits like sick pay, holiday pay, pensions etc | Not as tax-efficient as working through a Limited Company |
| Provides continuity of employment across contracts | Difficult to switch umbrella companies during a contract |
| Compliant with UK tax laws, HMRC regulations and IR35 | Some umbrella companies engage in tax avoidance and run fraudulent schemes |
| Handles all PAYE tax and National Insurance contributions on your behalf | Dependency on umbrella company for accurate & timely payments |
In summary, umbrella companies offer essential support to contractors in the UK, providing administrative assistance, ensuring tax compliance, and simplifying the employment process in the evolving gig economy. Understanding how umbrella companies operate empowers contractors to make informed decisions about their career and financial management.
Below is a list of umbrella companies partnered with us that we recommend.
| Umbrella Company | Benefits | Fee | Company Profile |
|---|---|---|---|
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Best Umbrella Company: Contracting Awards 2024 [Nominee] FCSA Accredited Professional Passport Approved Same day payments & wage advances available upon request Free subscription to DASA Rewards money-saving App All statutory entitlements including holiday, sick & maternity/ paternity pay | £10 Per Week | View Profile |
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Professional Passport Approved Payroll flexibility (weekly, bi-weekly, monthly) Free tax investigation consultation* Free employment dispute advice* Contractor portal Outstanding customer service |
£19 Per Week | View Profile |
If you are looking for an umbrella company, we can help you with that. You can either fill-up the Request a Call-back form below or write to us at [email protected]. You can also have a look at our list of top umbrella companies.
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