What is an Umbrella Company?
An Umbrella Company is an organisation that employs contractors with a view to carry out multiple assignments at a series of temporary workplaces for various Agencies and/or End Clients.
When you join a compliant Umbrella Company, you become an employee of the Umbrella Company and receive all the statutory rights that go along with normal employment.
An Umbrella employment contract must always contain a guaranteed minimum hours clause, which means a mutual obligation to work together to the benefit of each other.
The Umbrella Company enters into a contract with an Agency or an End Client for your services. You will need to submit your timesheets to the Umbrella Company who will in turn invoice the Agency or End Client for the work that you have carried out.
The Agency or End Client pays the Umbrella Company a rate – the contract rate – to cover the work you have done including all the costs related to your employment, such as employer’s NIC, holiday pay and other statutory costs.
The contract rate paid to the Umbrella Company is generally higher than you would expect to be paid directly by the Agency to account for these additional costs.
The Umbrella Company will employ you and handle the administration, payroll and insurance cover whilst you work on various assignments at different temporary workplaces. The Umbrella pays you on a Pay As You Earn (PAYE) basis after retaining the agreed Umbrella Company margin, tax, National Insurance contributions and other statutory costs that go along with employing you. All payments are subject to the National Minimum/Living Wage legislation.
You remain an employee of the Umbrella Company when you start a new assignment with a new agency or end client and between assignments.
Why choose the Umbrella Company option?
The Umbrella Company provides you with legal employee status and handles the administration and payroll. It’s a simple solution, with no unplanned tax bills and a straightforward process for claiming your allowable business expenses.
As an employee of the Umbrella Company, you will also have access to state benefits, such as a state pension and maternity pay and also be entitled to holiday pay.
Using a compliant Umbrella Company provides a safe and beneficial alternative to the Agency PAYE option.
Why do Agencies usually offer a higher rate if I choose the Umbrella option?
Your Umbrella Company signs a contract with your Agency (or End Client when no Agency is involved).
The Agency pays the Umbrella Company a rate – the contract rate. This covers the costs for the work you have done and all the costs related to your employment, such as employer’s NIC, holiday pay and other statutory costs.
This rate is generally higher than you would expect to get if you were paid directly by the Agency/End client, to allow for these additional costs.
The Agency will usually pay the Umbrella Company the same contract rate they offer if you worked through your own Limited Company.
What administration is involved with the Umbrella option?
Aside from the quick joining process, you will have to submit your timesheets and business expenses/receipts to the Umbrella Company within a certain time frame for processing. These are usually uploaded via an online portal.
The Umbrella Company takes over from this point and should provide you with same day payments, a full breakdown of your pay and an SMS to notify you that you’ve been paid.
What expenses can I claim?
Expenses must be ‘wholly, exclusively, and necessarily’ incurred in the performance of your employment duties (e.g. work related training, stationery etc.). They must be genuinely incurred, reasonable and allowable under HMRC’s rules.
You should refer to the Umbrella Company’s expenses policy for guidance.
Is the Umbrella Company option right for me?
The Umbrella PAYE option is most suited to you if you:
- intend to contract for the short to medium term
- want to trial contracting before making a decision to contract longer term
- want the flexibility of the contracting with the security and benefits of regular employment
- earn a rate of pay that can make working through an Umbrella preferable
- prefer a lower level of administration and responsibility than running your own Limited Company
- work on contracts that are inside IR35 or want to avoid the IR35 debate