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  • Writer's pictureUmbrella Search

How does an umbrella company work?

Updated: Feb 3, 2023

Umbrella companies have become increasingly popular recently, with thousands of contractors opting to use their services over a PAYE agency or go alone through a limited company.

If you are starting in contracting or have been contracting for years and want to know more about what options are open to you, Umbrella Search has put together this guide explaining how an umbrella company works and why you would use one.

What is an umbrella company?

Let's start with the basics. An umbrella company is a company that employs a contractor. As such, the umbrella company puts the contractor on its payroll and processes their salary through the PAYE tax system.

Although the contractor can choose which contract work they take on and when, the umbrella company deals with the client, invoicing, chasing payments, and collecting the contractor's fee.

How does an umbrella company work?

So what does this mean in reality for contractors?

If you opt to use the services of an umbrella company, you will generally have to undertake the following tasks:

  • Firstly, you will sign an employment contract with your chosen umbrella company

  • Once you have secured a contract to work on, you will then submit your timesheet to the umbrella company

  • The umbrella company will then take care of invoicing the client, chasing any late payments if necessary

  • The umbrella company will collect the fee from the client and then process the amount through their payroll.

  • The umbrella company deducts the correct tax and National Insurance levels from the contractor's pay, meaning that the contractor is always up to date with their tax obligations.

  • The umbrella company will issue the contractor a payslip outlining how much they have been paid and how much has been taken off their salary in deductions.

This is widely considered a great advantage of operating through an umbrella company, as contractors are always up to date with their tax affairs. Additionally, umbrella contractors don't have the stress and hassle of filing for self-assessment like limited company contractors.

What else does an umbrella company offer?

Claim back expenses

Contractors working through an umbrella company can also claim back legitimate business expenses. This means that contractors will receive tax relief on expenses accrued on the contract, which is considered another great benefit to this route.

Receive statutory payments

An umbrella company also gives contractors statutory payments, meaning contractors will receive statutory pay if they need to take time off work due to illness, take holidays, or take maternity or paternity leave.

On top of this, umbrella contractors will also receive a workplace pension.


An umbrella company will also cover the contractor with certain types of insurance required for the contract.

This includes employer’s liability insurance, which covers the contractor should they fall ill or get injured at work. This saves contractors from having to pay for this themselves.

Every umbrella company is legally required to have employer's liability insurance. Many will also ensure that the contractor is covered with professional indemnity and public liability insurance, again saving the contractor from having to fork out for these types of insurance themselves.

What is an umbrella company?

Exemption from IR35

As the contractor’s employer, an umbrella company also offers contractors a safety net against IR35 legislation. As the contractor is an employee, they are automatically exempt from IR35, meaning no stress or worry over whether or not they are inside IR35.

What to avoid when choosing an umbrella company

As we have outlined, there are many benefits to using an umbrella company. However, there are some red flags that contractors should be aware of when choosing which umbrella company to work with.

These include:

  • Avoid companies that offer to pay you through a loan, credit, or investment payment. These channels aren't subject to income tax, meaning that if the company pays you this way, the contractor is not fulfilling their tax obligations and can be fined or penalised if caught.

  • Avoid any umbrella company that claims to let the contractor keep up to 80-5% of their take-home pay and remain tax compliant. Again, as a contractor's pay is subject to income tax and National Insurance, this would mean that the contractor would be tax avoiding. Any umbrella company you choose should use the PAYE tax system to pay its contractors, ensuring that the contractor is meeting their tax obligations.

That's what to avoid in an umbrella company, so how do you find a great one?

Let Umbrella Search help.

To find an umbrella company that you know you can trust and works well for you, Umbrella Search is here to help.

Get in touch with one of our friendly and professional team members to find an umbrella company that's just right for you.

We only work with trustworthy umbrella companies with great reputations, so you know you will find a company you can trust.

Once we’ve worked closely with the contractor to understand their circumstances and requirements, we will do the research and due diligence to provide a list of umbrella companies that are an excellent fit for your needs.

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