How Does an Umbrella Company Work?

What is an Umbrella Company?

Umbrella companies have become an increasingly popular avenue for contractors over recent years.

It’s no surprise considering the wide range of benefits they provide.

An umbrella company employs the contractor, meaning they receive a number of benefits in return.

Firstly, the contractor is paid a salary by the umbrella company, giving them a greater degree of stability than if they were contracting on a self-employed basis through a limited company.

As the contractor’s employer, the umbrella company uses the PAYE system to deduct the correct amounts of tax and National Insurance from the contractor’s pay before it is paid to them. Again, this makes life a lot easier for the contractor who does not need to worry about filing for self-assessment which can be tricky and time consuming.

This means that the contractor also does not need to worry about setting aside money from their fee to cover the tax bill.

Unlike limited company contractors, as employees, umbrella company contractors qualify for statutory benefits. This is often considered a great advantage of operating through an umbrella company as it entitles contractors to paid sick leave, holiday leave, maternity and paternity leave as well as a workplace pension.

So, should the contractor want to take a break, or unexpectedly falls ill, they will not have to cover the costs themselves.

What’s more, by working through an umbrella company, the contractor is automatically exempt from infamous IR35 legislation. This is because they are employees of the umbrella company, meaning IR35 does not apply to them.

This is seen as a huge benefit to thousands of an umbrella company. After all, getting caught out by IR35 can be stressful, costly and time consuming to the contractor.

To find out more about IR35, check out our complete guide for contractors.

How does an Umbrella Company work?

As we’ve mentioned, an umbrella company employs the contractor, however, the contractor is still free to choose which contracts they work on, when and with which clients.

Unlike a PAYE agency, through contractors have no choice over what contracts they take on, umbrella contractors are free to choose, giving them a great degree of freedom and flexibility over their career progression.

As an employer, the umbrella company is responsible for:

  • Paying the contractor a salary
  • Making the necessary tax and National Insurance deductions and paying these to HMRC
  • Giving the contractor a workplace pension
  • Statutory payments
  • Covering the contractor with appropriate insurance

Rather than a limited company contractor that will work directly with the client, in the case of an umbrella company, it is them that signs the contract with the end client.

The umbrella company invoices the client on the contractor’s behalf for the work they have done. The client will then pay the umbrella company who will then pay the contractor minus deductions such as tax, National Insurance and pension contributions.

The umbrella company will then provide the contractor with a payslip showing their salary and deductions.

What to look out for when choosing an Umbrella Company

If you’ve decided that umbrella is the way to go, the next step is to find the perfect umbrella company for you.

So, what should you look out for when choosing an umbrella company?

  • Check the company’s reputation: contractors should always do their research into the umbrella company’s reputation to ensure they are trustworthy. Although most are, unfortunately there are a handful that aren’t, meaning it’s important to do your research. From checking reviews, looking at testimonials to seeing what accreditations the company has, it’s important to dig into their background to ensure you are choosing the best umbrella company for you.
  • Look at the umbrella company’s fees: in exchange for the range of benefits they offer contractors, every umbrella company charges fees. However, fees vary from company to company. Make sure you do your research to ensure you get a fair deal. Although you don’t want to be paying high sky fees, sometimes the cheapest isn’t always the best option.
  • Find out what insurance the umbrella company offers: as the contractor’s employer, the umbrella company is legally required to cover the contractor with employer’s liability insurance, protecting them should they fall ill or become injured at work. However, many umbrella companies also offer professional indemnity and public liability insurance which, although not legal requirements, are usually a requirement of the contract. This is important to consider as you will wind up forking out for these out of your own pocket if they are not provided by the umbrella company.
  • Ensure you are getting the right level of service: different umbrella companies offer different levels of service and many will offer extra perks and benefits at an additional cost. Therefore, it’s important to ensure you find a company that offers what you need at a fair cost. After all, if you require things like same day payments or help with childcare credits you will need to find a company that caters to your needs.

Use our Umbrella Calculator to find the best Umbrella Company

Now you know what an umbrella company is, how they work and what to look out for when choosing one, the next step is to use Umbrella Supermarket’s contractor calculator to help you find the best one for you.

Our umbrella calculator takes just 60 seconds to use and will generate a list of the best suited umbrella companies for you, so you can make a well-informed, educated decision.

To see how our umbrella calculator can help you, give it a go today.

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Is PAYE Better Than Umbrella?

If you are considering contracting you will need to decide on PAYE or umbrella.

It can be a difficult decision to make and contractors will inevitably be questioning which option will be the best for them.

To help every contractor get on the right track for them, in this guide Umbrella Supermarket looks at PAYE vs umbrella, outlining the key differences and how this will impact you.

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Why Should Contractors use an Umbrella Company?

There are many reasons that contractors across the UK opt to work under an umbrella company.

Umbrella companies offer an easy way to contract and remove the need for the contractors to worry about the burdens of admin, finances, tax and IR35, all things that limited company contractors have to deal with.

For this reason, many contractors will be weighing up their options and questioning whether it is worth using an umbrella company in 2021. To help make the decision that little bit easier, Umbrella Supermarket has put together this guide on the pros and cons of using an umbrella company.


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Does an Umbrella Company Charge Fees?

Any contractor that is considering operating through an umbrella company in 2021 will need to understand Umbrella Company fees - from why an umbrella company charges fees, how they are paid to how much the contractor will pay.

In this guide, Umbrella Supermarket answers those all-important questions to help every contractor know exactly where they stand when it comes to umbrella company fees.


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What Makes a Good Umbrella Company?

If you’ve made the decision to contract through an umbrella company in 2021, you will next need to find an umbrella company that’s right for you.

After all, there are lots of umbrella companies out there, so how do you know which one to choose?

To help you find the best umbrella company for you, in this guide Umbrella Supermarket outlines what makes a good umbrella company, so you can rest assured you’re making the right move.

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Guide to Umbrella Company Pensions

One of the many advantages to operating through an umbrella company for contractors is that they become an employee of their chosen provider.

In turn, this means that the contractor will be automatically enrolled onto the umbrella company’s workplace pension scheme.

To help contractors find out more about umbrella company pensions Umbrella Supermarket has put together this handy guide.


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Beginner’s Guide to Using an Umbrella Company

If you are considering contracting through an umbrella company you will naturally have questions and queries over how they work.

After all, making the move to umbrella can be a big step for contractors. To help, in this guide Umbrella Supermarket explains how to get started with an umbrella company and share our top tips for using one in 2021.


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PAYE or umbrella is a question asked by every contractor. Which one you opt for will have a big impact on your contracting career and lifestyle. So, it's important to make the right decision for you.

To help makes things a little bit easier, Umbrella Supermarket has put together this guide on PAYE or umbrella, outlining the key differences between each, to help you make the best and most informed decision for you.

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Complete Guide to Holiday Pay for Umbrella Contractors

One of the many benefits to working through an umbrella company is that you will receive holiday pay as well as a range of other statutory benefits including sick pay, maternity and paternity pay.

To find out more about umbrella company holiday pay, and how to calculate how much you will be entitled to, Umbrella Supermarket has put together this handy guide.

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When Shouldn’t You Use an Umbrella Company?

Contractors must make several decisions throughout their contracting careers. One big decision contractors have to make is how they will operate.

One way that contractors can work is through an umbrella company.

Umbrella companies have become an increasingly popular way to contract in the past few years, offering many benefits to the contractor. But, how do you know whether this option is right for you?

To help every contractor make the right decision for them, in this guide, Umbrella Supermarket explains when not to use an umbrella company.


The truth about HMRC approved Umbrella Companies

There are tons of benefits to using an umbrella company, which is why they have become such a popular option for contractors in recent years.

After all, an umbrella company takes away the stress and hassle of operating through a limited company whilst offering contractors a range of advantages, such as statutory rights, paying them a salary, deducting correct tax levels and National Insurance, and taking care of tasks like expense processing and invoicing.

However, as more and more contractors opt to use the services of an umbrella company, more providers have started to claim that they are HMRC approved.

To bust the myths around HMRC approved umbrella companies and get straight to the facts, in today's guide Umbrella Supermarket look at whether HMRC approved umbrella companies really exist, so you know exactly where you stand.

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How Much are Umbrella Company Costs?

If you're considering making the leap to contracting, you will understandably want to know how much you will have to pay in umbrella company costs. After all, this amount comes directly out of the contractor’s pocket, so it’s important to be clued up on how much you should expect to pay.

To help contractors, in this guide Umbrella Supermarket answer the all-important question of how umbrella companies cost in 2021.