Umbrella Companies
An Introduction to Umbrella Companies
An umbrella company is an organisation that acts as an employer for contractors working on temporary assignments, typically through a recruitment agency. This setup provides a simple and compliant way for contractors to receive their pay while avoiding the administrative responsibilities of running a limited company. Here's a detailed overview of umbrella companies, how they work, and their benefits and drawbacks.
Employment by the Umbrella Company
When you choose to work with an umbrella company, you become an employee of that umbrella company. The umbrella company processes your pay and handles your taxes, including Pay As You Earn (PAYE) tax and National Insurance Contributions (NICs), just like a regular employer would for an employee.
Invoicing and Payments
Once you’ve completed work for your client, you submit timesheets to both the recruitment agency and the umbrella company. The umbrella company then invoices the recruitment agency or the end client for the work completed.
Deductions from Income
After receiving payment from the client or recruitment agency, the umbrella company processes your earnings. They deduct income tax (PAYE), NICs, the umbrella company’s fee, and any other statutory deductions (like pension contributions or student loan repayments). Once all deductions are made, they pay you the remaining amount as your net salary.
Employee Rights
Since you are technically an employee of the umbrella company, you are entitled to statutory benefits such as paid holiday (typically rolled into your hourly rate), statutory sick pay (SSP), maternity or paternity leave, and employer pension contributions through automatic enrolment.
Advantages of Using an Umbrella Company
Easy Compliance with Tax and Legislation
No Admin Hassle
Employee Rights and Benefits
Flexibility
Reliable and Timely Payments