Umbrella Companies Explained

Contractors are often tempted to join umbrella companies, but what do these organisations do, and how do they work? We explain everything you need to know here.

Whether you're new to contracting or have been working for yourself for some years, you've almost certainly heard of umbrella companies. You might have been told that they are useful for self-employed professionals, and possibly you should join one. But what exactly are they, and how do they work?

To help you out, here is an introduction to umbrella companies and how you could work with them. If you need more information, you can always download our free guide below, or get in touch to book a free consultation.

What is an umbrella company?

Put simply, an umbrella company is an organisation that takes on the role of employer for independent contractors. Rather than organising their own payroll and taxes, a freelancer can instead sign a contract with the umbrella company and work through them.

The company's role is to provide an employment solution and PAYE service for the contractors that have signed up with it. It will send out invoices, deduct taxes and pay contractors what they're owed. Its role is not to find work for you or tell you what jobs are available; you still have the freedom to do that. However, your clients will pay the umbrella company rather than you directly.

So what's in it for the umbrella company? Well, they deduct a pre-agreed margin from your earnings in exchange for sorting out the administrative elements of contracting for you. You're essentially paying them for arranging your finances, processing your pay and preventing you from having to send and chase up invoices. each year.

How does the process work?

If you work directly for your clients, then signing up with an umbrella company means you no longer need to worry about invoicing them. Instead, you will fill out a timesheet - and get it signed by a manager or supervisor - whenever you undertake work. You then pass this on to the umbrella company.

The company then sends out the invoices for you, usually on either a weekly or a monthly basis. You will then receive a salary from the umbrella firm, with PAYE income tax, National Insurance and the company's fee deducted from it.

If you work through a recruitment agency, the process is essentially the same. The only difference is that you will probably have to give a copy of your timesheet to the agency as well as the umbrella company. The client will pay the recruitment agency, which will pay the umbrella company, which will pay you.

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