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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