• Industry Insights

What is an Umbrella Company in the UK?

Are you looking for an umbrella company but spoilt for choice? You are not alone because umbrella companies continue to thrive in Britain. This is down to the changes to the IR35 legislation in the private sector coming into effect and approximately 4.37 million UK residents choosing to be self-employed but with so many to choose from, where do you start?

In this article:

• What is an Umbrella Company?
• Why use an Umbrella Company?
• How do Umbrella Companies work?
• Is there a list of HMRC approved Umbrella Companies?
• How to choose an Umbrella Company.

What is an Umbrella Company?

An umbrella company, or PAYE umbrella, will act as the intermediary between a contractor and their end-client or the recruitment agency they have engaged with for an assignment. This way of working is an alternative to using a limited company. Umbrella companies can offer contractors security, take away administration burden, and genuinely make life easier for those working in this way.

The umbrella will also handle the contractor’s payroll. They invoice the end-client / recruitment agency for the work that has been completed and then pay it back to the contractor as a net salary. The contractor will become an employee of the umbrella company, they will deduct PAYE, National Insurance contributions and pension deductions to the HMRC on the contractor’s behalf.

Why use an Umbrella Company?

For contractors starting and wanting to focus on their assignment, using an umbrella company is a hassle-free way to get on your feet. It is also a great option for those who are only dipping their toe in the world of contracting for a one-off short term assignment.

Choosing the umbrella path means you will not enjoy the same tax-efficient way of working your limited company counterparts benefit from as you are being paid like an employee and IR35 determinations will not apply.

The biggest benefit of choosing to work with an umbrella company is that they will do everything for the contractor. Running a limited company can be challenging and a lot of work. The contractor will not have to worry about record-keeping, accounting, VAT returns and everything else involved with operating as self-employed. They can just concentrate on the job at hand.

How do Umbrella Companies work?

If you choose to join a PAYE umbrella company the process will look a bit like this…

1. When you lock in your first contract role, your umbrella company will sign a contract with the recruitment agency you have engaged with. They will then draw up a contract of employment for you to sign so you can start work.
2. You will start work and usually, after the first week, you will ask the person you are reporting to, to complete a timesheet for the work you have completed.
3. Once completed, you will submit your timesheet to both your recruitment agency and your chosen umbrella.
4. The umbrella company will then invoice the recruitment agency for your time worked and the recruitment agency will invoice your end client.
5. The recruitment agency usually pays your umbrella company on the agreed date, regardless of whether the end client has paid yet.
6. Your umbrella company will prepare payroll, pay you a salary and make the appropriate deductions for taxes, pension contributions, certain expenses, and any agreed fees with the umbrella company for their services.
7. You are issued with a payslip that outlines all deductions and net pay as if you were a permanent employee.

Is there a list of HMRC approved Umbrella Companies?

Straight out of the gate, no there is not. Some umbrella companies will claim to be, ‘HMRC approved’, but this is a misleading term. The HMRC does not approve any umbrella company. The phrase means that the HMRC works with the umbrella company as it does with any other company that runs a payroll service.

With that logic in mind, any umbrella company that is acting lawfully and compliantly with employment law will be classed as ‘HMRC approved’. The search for an umbrella company is full of jargon that is open to interpretation, which is why finding a good company can take time but it is worth the effort.

How to choose an Umbrella Company.

Many helpful websites offer insights into the best umbrella companies in the UK, but we would not advise taking this as gospel truth as those lists can be easy to get onto with a bit of cash.

Recruitment agencies usually have a preferred supplier list as they deal with umbrella companies daily. Your recruitment consultant should be happy to pass this on to you if you ask. You can also look to see which companies are part of membership bodies like the FCSA, which is recognised as the industry’s compliance gold standard.

Last but far from least, just asking your colleagues who are also contracting is still one of the best ways to find out the good, bad, and ugly of the umbrella world. If you have just started and do not have access to these contacts yet there are plenty of message boards where contractors have already asked the same questions you can access on search engines.