What are Umbrella Companies? And How do they operate?

A company that employs contractors mainly working on fixed-term contracts and is responsible for deducting PAYE and National Insurance tax is called Umbrella companies. They need to follow HMRC’S rule while deducting PAYE and National Insurance.

As an employee of the umbrella company, you are eligible to receive maternity pay, paternity pay, statutory sick pay, and access to a workplace pension. Not only that, even while working for a defined period of time, you will get all the benefits of being a permanent employee.

Further, when you want to take a loan from banks, you won’t face problems. You will also receive benefits like discounts on online purchases, cashback at petrol stations, etc.

How do umbrella companies operate?

Umbrella companies follow a pattern to operate businesses. Here is the step-by-step summary of it

  • In the first step, the umbrella company enters into a business-to-business relationship with the recruitment agency.
  • Then they sign a contract with the recruitment agency.
  • After this, the worker needs to sign a contract with the umbrella company as your employer.
  • The employee will start working on the client project (recruitment agencies and client) and complete it within a specific time period.
  • A manager will look over the work and will sign a professional timesheet. It will provide information about the days and hours the employee has worked.
  • It may include expenses.
  • The employee will inform the umbrella company after finishing the work.
  • After that, the worker must submit the timesheet to the umbrella company and the recruitment agency.
  • The umbrella company will prepare an invoice for the recruitment agency and send it to them.
  • The recruitment company will send it to the end client.
  • The end client will pay the recruitment agency.
  • The recruitment agency will reimburse the umbrella company.
  • The umbrella company will process the worker’s payroll. It will give them the salary and recompense expenses after deducting employment taxes, pre-agreed fees of the umbrella company, personal taxes, Pension (not necessary), and previously agreed-on amount.
  • The company will provide a pay slip with all the deductions and net pay.
  • Umbrella companies can also operate directly with the end client.

Why should workers use an umbrella company?

An Umbrella company works as a link between the recruitment company, end client, employee, and umbrella company itself. There are multiple reasons to utilize an umbrella company. The reasons are as follows

  1. Makes the work easy for contractors

The individual workers don’t need to engage themselves in legal or financial work. Instead, they can focus on their core work without making any tax declaration

  1. Little to no risk of back paying taxes

The umbrella company works to make sure that your international operations are compliant. The employee doesn’t need to pay penalties. However, the company is responsible for making necessary deductions.

  1. Saves the worker from taxes

There are cases where the umbrella company engages a limited company owned and operated by workers. This arrangement can result in reducing taxable income and claims for additional expenses.

  1. Free from building a limited company

A comparatively new worker or contractor will first avoid setting up a limited company. They can get into a contract for a short time.

  1. Don’t need to keep the records of the company

The worker can find their way out of administrative problems with the help of umbrella companies. They are not bound to file VAT returns and other documents.

  1. IR35 is not applied

As the worker is an umbrella company employee, he doesn’t fall under IR35.

  1. Hassle-free work on temporary projects

The worker can start their work on various temporary projects without any problems with taxes, chasing payments, and sending timesheets.

What will be the expenses?

The worker will get legitimate business expenses that were decided with the client or recruitment agency. These are called chargeable expenses. They can claim the charge of any business expenses that they incurred.

In case it was survived, directed, or controlled by the client, you can’t claim it. Further, you also can’t demand travel and survival fees in this situation.

Over to you…

As I have discussed all the reasons and benefits of the umbrella company, it’s time for you to make an informed decision and move ahead.




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