What is an umbrella company? And how do they work?

Well, within this article we will explain everything you need to know about umbrella companies and what would happen if you decide to become part of one in 2019. We will also be going through some issues that arise when contracting through an umbrella company, as well as the many benefits.

Because, in every way of working, there are some positives and negatives.

What exactly is an umbrella company?

An umbrella company is a company that employs contractors that either work through an agency or themselves. They usually work on temporary contracts; however, they can work on more elongated projects that the company needs a hand on. There are more umbrella companies around today, in the last 20 years, than ever before! This is because of the IR35 legislation that was introduced back in April 2000.

Man holding up the umbrella company with employees in the background

So, here is how an umbrella company works within the logistics.

The umbrella company processes the timesheets that have provided from the contractor and/or employee. They then issue an invoice to their client to request payment. Invoicing can be different with different company clients.

An umbrella company is classed as an employer, therefore, all contractors working with them should sign a contract of employment, this outlines the contractor services that they must provide on the job. Fortunately, all of your rights as an employee are safe like sick pay, holidays etc.

Unfortunately, there are quite a few issues with tax rules as HMRC has yet to be extremely clear on what contractors and freelancers are entitled to. You basically have to inform them of everything that is going on and they will make the decision for you.

The umbrella company usually provides a payroll on behalf of the contractor. Following this, they bill the agency and then bill the client for the work that has been completed by the contractor. Luckily for contractors, the umbrella company provides all of the tax payments needed or PAYE, which includes national insurance.

The client or company that the contractor is working for then dishes out more work, as necessary. It’s quite simple in that regard. The client has no obligations to use the same contractor again either. Therefore, you can sometimes see how this can be a liability of work as you have no permanent employment to this company. However, if you have a steady stream of different clients, then it all works out as an umbrella organisation at the end of the day.

If there is an agency involved in this process, it usually goes out of its way to recruit on behalf of the company. The PAYE scheme is then usually on the table.

The contractor, freelancer or employee completes the work that they have been given to do. They complete a timesheet or write down what they have done and how long it took. They usually add any expenses that the umbrella company might come across as well. Depending on the type of work as well, this can mean travel expenses, deductions, statutory sick pay and the contract rate for temporary workers.

Many people in business attire holding up umbrellas

How do pay and expenses work within an umbrella company?

As previously mentioned, umbrella companies use PAYE calculations to ascertain exactly how much tax should be paid per contractor. An umbrella company then takes a small amount from the contractor to continue the company schemes that they push for.

When it comes to expenses that can be allowed when working, you are usually looking at travel expenses and accommodation expenses, training and even IT costs. Usually however, there are restrictions on expenses that you cannot claim like food expenses as you are expected to eat in and out the job.

Some umbrella companies tend to have some sort of dispensation agreement with HMRC. This is usually just to take away a lot of extra paperwork that might mount up at the end of the year. However, some expenses are required to come with their very own receipts. Without a receipt, you’re more than likely to find that you won’t get a penny back.

In all honesty, that’s more of a certainty, you know for sure what companies are like when it comes to money.

Is an umbrella company really right for you?

Contractor on a sofa in the sea with umbrella

Don’t forget that that an umbrella company also goes through a recruitment agency to find you. Therefore, if you haven’t contacted them then you might want to hear them out on what they have to say about your potential job prospects.

One thing that you will be chuffed about is that umbrella companies are still required by law to offer pension contributions and any existing pension contributions will be safe. This proves that these types of companies still care about your statutory rights as an employee and/or contractor. At the end of the day, all of your employee benefits are still there! So, you don’t have to worry unless you have seen something you particularly don’t like.

When deciding if an umbrella company is right for you however, you need to consider finances over everything else. Therefore, determining your very own IR35 status is very important.

You can read up about IR35 in our article “what is IR35”.

There are quite a few other factors that we would like to go over but we will save them for their very own article. As we believe these are issues which need their very own comprehensive article to cover in detail.

In this way, we can tell you all about what goes into choosing the best umbrella company for you.