What is an Umbrella Company?

An Umbrella Company is a special type of organisation that employs contractors in order to help them fulfil and invoice for numerous short to medium term contracts. Have more questions? Talk to the team at Umbrella Supermarket today.

In order to help a contractor to fulfil their contract, the Umbrella Company will engage with their agency or end client, seconding the contractor to fulfil the contract on their behalf.

When the contractor notifies the Umbrella Company of the time spent on the contract (weekly or monthly depending upon their contracted terms) the Umbrella Company will raise an invoice to the agency or client for the value of the work.

Once funds are received for the work, the Umbrella Company will calculate and pay the correct income tax and National Insurance contributions to HMRC, passing the remainder to the contractor less any costs.

Although contractors consider themselves to be self-employed, when working through an Umbrella Company (assuming they don’t have any other forms of income) they become employees of the Umbrella in order to be processed through their PAYE payroll.

Umbrella Companies take a fee in exchange for providing contractors with these employment services. This fee is deducted from the gross billed amount prior to processing their payroll.

Umbrella Company Benefits

Becoming an employee of the Umbrella Company grants contractors access to various statutory rights including:

  • The Minimum Wage
  • Holiday Pay
  • Sick Pay
  • Maternity/Paternity Pay

Additionally, as an employee the contractors work will be covered under the Umbrella Companies Professional Liability & Professional Indemnity Insurance.

In order to differentiate in a crowded market place, some Umbrella Companies might also choose to provide their employees with additional benefits such as access to store discounts, cycle to work schemes and gym memberships.

Contracting through an Umbrella Company is therefore considered to be the lowest hassle way for a contractor to get paid and pay any taxes due.

However due to the fee charged and the contractor shouldering the Employers National Insurance (ENI) Liability they can often be seen as offering a lower take home pay than if the contractor were employed direct by the end client or if the contractor were to use Limited Company.

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What’s the difference between an Umbrella Company and standard PAYE?

Contractors using an Umbrella Company’s PAYE payroll will encounter additional deductions from their gross pay in the form of fees and Employers National Insurance contributions when compared to a normal employee.

Employers National Insurance (ENI) contributions are additional National Insurance payments that an employer has to make over and above the contributions an employee makes from their salary. As part of the Umbrella Contractor relationship, in return for a low Umbrella Company processing fee, the cost of ENI is deducted from the gross billed amount on a contract.

Through standard PAYE, there’s no Umbrella processing fee, and the burden of ENI falls on the employer meaning that the full salary is goes through the company payroll.

It’s important to remember that contractors are often paid a higher day rate than a normal employee for the same work to compensate for this.

Additionally, there are other reasons why a contractor’s day rate might be inflated over and above an equivalent employee’s including:

  • The loss of holiday pay
  • The loss of sick pay
  • To cover basic equipment costs
  • Down time between contracts

If a contractor were to be paid the same per day as an employee they would be at a significant financial disadvantage.

Firstly, this is because a salaried worker on £52,200 per annum is effectively paid £200 for every possible working day of the year (in 2019 that will be 261 days).

An equivalent contractor will not be able to bill 261 days a year, as they will need to take time off on holiday. This means that assuming on average contractors take 25 days holiday a year, they will need to earn £221 per day to make £52,200 per year.

Secondly,the impact of holidays on billable days is not actually the biggest hit a contractor will take. If a contractor were to earn £52,200 per year, they would actually pay £5,972.64 more in tax than an employee because they have to pay the full Employers National Insurance contributions from their day rate. That’s an effective hit of £25 per working day.

Thirdly, in addition to the ENI and billableday’s implications of being a contractor, the fee charged by an Umbrella Company comes off the £52,200. On average working through an Umbrella Company will cost £4 per working day meaning that a contractor will actually take home £51,256 (£196) before even considering points one and two.

For a contractor on £52,200, the relative hit when these three problems are combined is £50 per day, meaning to move from standard PAYE to Umbrella PAYE, a £52,200 contractor needs to be earning 25% more than a normal employee to see any financial benefit.

What is IR35?

In April 2017 the UK Government tweaked the IR35 False Self Employment Rules. These rules sought to establish whether a contractor was really an employee in all but name.

In order to establish this fact, HMRC sought to look at the actual contract between a contractor and their end client. In order to establish if a contractor was in fact an employee HMRC would look at several factors including:

  • Can the contractor choose their place of work?
  • Can the contractor send a suitable substitute to perform the work?
  • Can the contractor wear whatever they want?
  • Can the contractor work whenever they please?

If the answer to these questions was no, then the contractor was in risk of being caught by IR35 and its subsequent financial penalties.

In response to this, most contracts were written to ensure IR35 compliance, regardless of whether or not they reflected actual working practices.

Penalties aside, if contractors were deemed to be “Inside” IR35, they would need to process their payroll as if they were employees. In practice for those working through an Umbrella Company (where they were employed and thus processing their payroll this way) the impact was minimal.

However for the 86% of contractors working as either Sole Traders or through Limited Companies, and exploiting tax breaks, it had large ramifications so remaining outside of IR35 was paramount.

In April 2017, the UK Government tweaked the IR35 rules to disregard the way a contract was written, and formally push the responsibility of deciding if a contractor was inside IR35 onto the end client (if the end client was in the public sector). As a result enmasse, government agencies declared their contractors inside IR35.

This seismic shift caused thousands of contractors to move from being sole traders or directors of their own companies to Umbrella Company payroll because the other options no longer offered any financial benefit.

From April 2020, all contracts regardless of being Public or Private sector related will be subject to these rules.

Want to learn more about IR35?

How to Find the Best Umbrella Company

Assuming a contractor has secured a day rate rise that makes it financially beneficial to contract, it’s important that you find the best Umbrella Company in the UK for you.

Yet finding the right Umbrella for your circumstances isn’t as straight forward as it may seem. Despite mentioning above that the Umbrella Company fee will have a direct impact upon your take home, this negates to focus on the relative financial benefits offered by different Umbrellas.

The fact is that not all Umbrellas were created equal. Some offer more rewards for their fee and therefore when looking for the best Umbrella Company you need to factor in not just what you take home through PAYE, but the money you’ll have left in the bank at the end of each month.

As an employee of an Umbrella Company you may be able to claim additional employed tax benefits such as the marriage allowance or childcare credits. These might seem trivial but on average a contractor on £150 per day could be £57 per week better off when factoring these in. But not all Umbrellas will help you apply for these.

In a situation where one Umbrella Company fee is £10 more per week than another, but it will help you apply for these tax breaks, you would actually end up £47 per week better off by choosing the more expensive Umbrella.

Additionally, some Umbrella Companies differentiate their services through offering employee perks such as store or retailer discounts. This means that contractors who spend significant amounts on lifestyle purchases such as cars or food, could actually find that their employee perks save them funds that not only exceed the extra Umbrella Company fee they pay but their entire Umbrella fees altogether.

For that reason it’s important to compare Umbrella Companies side by side to gauge their actual financial benefits to you. A mission that Umbrellasupermarket.co.uk set out on in 2017, helping thousands of contractors in the process.

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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.


Holiday Pay for Umbrella Contractors

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.


Choose Between PAYE or Umbrella

How to Choose Between PAYE or Umbrella

Every contractor faces the decision between PAYE or umbrella, but how do you know which is the best option for you?

After all, PAYE and umbrella both have key differences, meaning contractors should do their research to find the best path for them.

Thankfully, Umbrella Supermarket is here to help. In this guide, we take a look at PAYE vs. umbrella, explaining what you should know before making the all-important decision.

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How to choose between public sector vs. private sector for contractors

Every contractor must make the decision about whether to work in the public sector vs private sector.

Operating in the public or private sector can have a big impact on the contractor’s career, including on what types of contracts they will work on, who they will work with to whether they will fall under IR35.

This is especially true since changes to IR35 legislation were rolled out in April this year which have had a significant impact on private sector contractors.

If you are debating between contracting in the public sector vs private sector, Umbrella Supermarket are here to help. In this guide, we outline the key differences between the public and private sectors and what effects this will have on contractors.

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How Does an Umbrella Company Work?

In light of recent IR35 reforms that came into force in April 2021, many limited company contractors are now thinking about making the move to Umbrella.

However, understandably, many will want to know more about umbrella companies and how they work before taking the leap.

To help these contractors decide whether Umbrella is the best move for them, Umbrella Supermarket have put together this ultimate guide on everything there is to know about umbrella companies in 2021.

Using an Umbrella Calculator

The Pros of Using an Umbrella Calculator

There are many advantages to using an umbrella calculator for contractors.

Umbrella calculators allow you to quickly compare thousands of umbrella companies across the UK, offering a clear overview of what you will receive from the company, including everything from your take-home pay, what benefits you will receive, and what services the company will offer.

To help contractors find out more, Umbrella Supermarket outlines the main benefits to using an umbrella calculator in 2021.

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Umbrella vs Limited Company: What to know when making the move this new tax year

The 6th April 2021 marked significant changes to IR35 legislation which impacted thousands of self-employed, limited company contractors operating within the private sector.

In light of the changes that have now rolled out, many limited company contractors are understandably considering their options and thinking about making the move to umbrella this new tax year.

To help make the decision that little bit easier, in this guide Umbrella Supermarket outline what contractors need to know about making the move from limited company to umbrella in 2021, to help you get on the right track.


umbrella company vs paye

Umbrella Company vs PAYE: What should you choose?

Umbrella company vs PAYE is a question asked by thousands of contractors.

After all, it’s a big decision to make that will have a direct impact on your contracting career and day-to-day life, so it’s not one that should be taken lightly.

To help every contractor make the right decision for them, Umbrella Supermarket has put together this insightful guide outlining the key differences between umbrella and PAYE and the advantages and drawbacks of each.

Ready to take the next step in setting up your structure?