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Umbrella Companies

The Ultimate Guide To Umbrella Companies

Written By Contractors, For Contractors

One of the most common issues you’ll face as a contractor is how you intend to provide your services to your clients. Should you work via an umbrella company, set up your own business, or become a sole trader? What about IR35? How does this impact working arrangements? Deciding how to run our contractor business is complex, and many contractors may not fully understand the processes involved. 

Understanding umbrella companies and when to use them can be a challenge. There’s a tremendous amount of information surrounding taxes, fees, expenses, payslips, and how it could all affect you as a contractor. Our comprehensive guide covers all you need to know; we’ll answer all the frequently asked questions, such as “How does an umbrella company work?” and “Should I use an umbrella company?” and look at the difference between umbrella companies and limited companies.

HMRC’s rules and legislation mean that contractors can’t be expected to know the law inside out. Please only use this resource as a guide – seek professional advice if you are unsure about anything.

Table of Contents

What is an Umbrella Company?

Umbrella companies act as employers to contractors for the length of a specific engagement, turning the self-employed into taxable employees. They employ contractors working on temporary assignments, serving as intermediaries between contractors and their clients (the end client or recruitment agency).

While the concept of an umbrella company may seem counterintuitive to being self-employed, they serve a required niche created by the introduction of IR35. As contractors become employees for the time they work through an umbrella company, they are no longer subject to IR35 checks. As such, umbrella companies are the most popular choice for those required to work inside IR35…

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How to Choose an Umbrella Company

Recruitment agencies and end clients often have a preferred suppliers list, an exclusive list of umbrella companies they work with. If you want to work with a particular agency or client, your choice of which umbrella company to use could be restricted.

It is often difficult to distinguish between compliant and non-compliant umbrella companies simply by their website or a brief call. Some umbrella companies claim they’re “HMRC-approved” or “IR35-compliant”. While these claims may sound impressive, they are, in fact, meaningless…

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Umbrella Company Tax Avoidance

A tax avoidance scheme operates with the intention of bending the rules of the tax system to gain an advantage that was never intended. They often involve contrived, artificial transactions that serve little or no purpose other than to produce this advantage. When it comes down to it, most tax avoidance schemes do not work, and those who use them may have to pay much more than the tax they tried to avoid, including penalties.

In recent years, various tax avoidance vehicles masquerading as umbrella schemes have targeted contractors and other workers, offering inflated take-home pay rates. The warning signs may be obvious to established contractors, but many have been duped into using them…

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Umbrella Company Tax and Pay

Contractors are employees of their umbrella company and, as employees, should receive a payslip for every contractually agreed payment cycle. For both new and experienced contractors, understanding an umbrella company payslip may be challenging; it’s not easy to follow how pay has been calculated or what deductions have been made.

The difference between an assignment rate, gross pay and taxable income is a common cause of confusion amongst workers new to umbrella employment. Contractors working Inside IR35 via an umbrella company are advised to understand the different types of pay quoted during negotiations, as the actual rate they receive could be less than expected…

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Umbrella Company Fees (Margin)

An umbrella company margin is the fees the umbrella company charges contractors for their payroll service. It is the only income the umbrella company receives as they do not directly benefit from the work performed by contractors. The margin covers the cost of running the contractor’s payroll, administration, internal staff salaries and other business costs…

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Umbrella Company National Insurance

When a contractor signs up with an umbrella company, the umbrella company becomes the employer and the contractor the employee. In this relationship, the umbrella company provides a payroll service to the contractor; however, they don’t benefit from any work performed during the contract. As a result, umbrella companies are not in a position to cover the employer’s NICs.

The end client is the organisation benefiting from the work, although they are not technically the employer in this supply chain. Therefore, the employer’s NICs are passed on to the contractor. There is a common misconception that umbrella companies are being unreasonable by passing these employment costs on; however, they have no choice. As contractors don’t work directly for the umbrella company, the umbrella company cannot afford to cover the required deductions…

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Umbrella Company Holiday Pay

Contractors working through umbrella companies are employees and are therefore entitled to statutory holiday pay under the Working Time Regulations 1998. In this relationship, the umbrella company provides a payroll service to the contractor; however, they don’t benefit from any work performed during the contract. As a result, umbrella companies cannot directly cover the holiday pay, which must come from the contractor’s earnings…

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Umbrella Company Expenses

Claiming expenses while working through an umbrella company is virtually impossible. Since April 2016, HMRC legislation has severely restricted what expenses contractors can claim while inside IR35.

While expenses can technically still be reimbursed, you cannot offset them against your earnings like you can while working outside IR35 through a limited company. Similar to permanent employees, all expense claims must be submitted, approved by the client, and paid in addition to your regular contract income…

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Umbrella Company Pensions

When considering umbrella company pensions, contractors have three options: workplace pensions, salary sacrifice and contributions from net pay…

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Umbrella Company Maternity Pay

As an umbrella company contractor, the Government considers you a full-time employee. You’re therefore entitled to the same benefits as a permanent employee, including statutory maternity pay (‘SMP’)…

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Umbrella Company Sick Pay

Sick pay is a crucial element of UK employment law. As an umbrella company worker, you are an employee of your umbrella company, so statutory sick pay is available to you. Unlike traditional employer-employee relationships, no enhanced sick pay is available…

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Inside IR35 Calculator

Our inside IR35 calculator looks at the financial implications of being caught by the IR35 tax legislation, having to work through an umbrella company.

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Outside IR35 Calculator

Our outside IR35 calculator looks at the financial implications of working via a limited company.

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