Umbrella Factsheet

What is an umbrella?

An umbrella company is an employer of contractors and freelance professionals who complete numerous different assignments at various locations for recruitment agencies and/or end hirers. The umbrella enters into an employment contact (contract of services) with the worker, and a service contract (contract for services) with the agency.

The Supply Chain

This mechanism gives the worker freedom to undertake a series of temporary assignments via a variety of agencies/hirers whilst having continuity of employment with all statutory rights and benefits.

Key benefits of umbrella employment to the agency or end-hirer

A fully compliant umbrella employer manages the commercial, employment, taxation, and statutory risks associated with the use of temporary workers for the supply chain. This minimises the overheads, employment risk and administrative burden of managing temporary workers in-house.

The alternative would be to process a significant amount of paperwork each and every time a temporary worker wishes to be redeployed to a different role, agency or hirer.

In a fast-paced project-driven environment such as contracting where workers frequently change assignments, the resulting red tape of treating each change as a new employment would quickly become unmanageable.

Key benefits of umbrella employment to the worker

  • Employment rights, including all statutory rights and benefits such as holiday pay, maternity, paternity, sick leave, pension etc.
  • Employment history whilst working on a contingent, multi-location basis (notably to support access to finance, housing/mortgages, etc.)
  • Joined up pay from fragmented working:
    • many workers will perform multiple assignments during a week or a month
    • Umbrellas consolidate their workers earnings and ensure appropriate taxes are paid
  • Peace of mind that tax is paid appropriately, with no need to submit an annual self-assessment return to HMRC
  • Employee/HR support
  • Ability to claim allowable employee expenses through P87 or self-assessment
  • How pay is calculated

    The umbrella firm receives assignment income paid by the agency for the work undertaken. Like any employer, the umbrella must cover employment costs which includes employers national insurance, holiday pay, pension contributions and other statutory employment costs. These employment costs are deducted from the assignment income. Umbrellas also retain a small transparent margin to cover their costs for the services they provide. This is also deducted from the assignment income, and the balance is the workers’ gross pay.

    The Agency Workers Regulations 2010 provide that umbrella employees receive at least equivalent rights to their full time equivalents, including pay. This means that the assignment rate must usually be greater than the rate which the equivalent employees of the recruitment agency or hirer receive in order to achieve that.

    What are the advantages to working through an umbrella?

    Contractors working for an umbrella firm are by definition employed by that umbrella firm, and therefore have access to all statutory rights and benefits of employment. This includes annual leave, maternity, paternity, sick pay and pension contributions, and all of these rights are provided for by the umbrella firm.

    Do Umbrella employees pay the employers national insurance and other employment costs?

    All employers are legally required to pay employers national insurance, as well process employee deductions.

    Complaint Umbrellas are always transparent about how they calculate gross pay, i.e. that employment costs are deducted from the assignment rate.

    However in some instances this has led to the misunderstanding that employees are paying employers national insurance and other employment costs, whereas in fact this amount does not constitute any element of the workers’ gross pay.

    The employers’ national insurance and other employment cost is never deducted from workers’ pay, however this deduction should be factored into calculating the assignment rate, i.e. it is in addition to workers’ gross pay.

    If a worker is paid via the agency or end hirer payroll, the employers national insurance and associated employment costs need to be paid in addition to the gross pay – i.e. these costs needs to be factored in the assignment rate paid to the Umbrella company from within the supply chain.

    Umbrellas will also retain a small margin to cover their costs for the services they provide which should always be transparent.

    Compliant umbrella companies provide illustrations of all the deductions and provide a full explanation of how an Umbrella company operates prior to the employment contract being entered into.

    Are Umbrella employees self-employed?

    Compliant umbrella firms employ contractors. Anyone working through an umbrella is by definition employed, and not self-employed.

    Do Umbrella employees have access to a company pension?

    By being employed, anyone working for an umbrella firm has the same pension rights as any other type of employment, and all of these rights are provided for by the umbrella firm.

    Every umbrella firm must provide a pension scheme and automatically enrol employees into it, as every UK employer does, under the Pensions Act 2008.

    Why have umbrella firms become more prevalent in industries that place self-employed workers into jobs?

    Onshore Intermediaries legislation, set out in the Finance Bill 2014, resulted in agencies being liable for workers PAYE, including employers NICs, unless it is shown that the individual is genuinely self-employed.

    This was a significant change for agencies who now needed to either pay their temporary workers via PAYE, or assure themselves that workers are genuinely self-employed. Umbrella firms provided a solution because they employ their workforce and pay them via PAYE.

    Are Umbrella firms new to the industry?

    Umbrella firms have been in existence for some 15+ years. They were formed to service the requirements of professional contractors undertaking a series of assignments who needed specialist back-office support to take care of their tax affairs. Umbrella firms evolved to meet this requirement, enabling contractors to carry out their assignments without also needing to become skilled financial specialists to run their own affairs.


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