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  • Writer's pictureUmbrella Search

What is the meaning of an umbrella company?

Updated: Sep 18, 2023

Whether you are considering contracting as the next step in your career or are a seasoned contractor with years of experience under your belt who has worked under a PAYE agency or limited company in the past, you may be considering switching to an umbrella company.

If this is the case, you will need to understand exactly what an umbrella company is.

From how they work to what this will mean for the contractor's day-to-day life, this guide, Umbrella Search, outlines everything you need to know in our complete guide to the meaning of an umbrella company.

What is an umbrella company?

Let’s start by looking at what an umbrella company is.

When deciding to use the services of an umbrella company, the contractor becomes an employee of their chosen provider. However, although they are employed by the umbrella company, they maintain free reign to choose their own contract work meaning total control over their career progression and path.

The contractor will work on their chosen contract and, rather than billing the client directly, will instead submit a timesheet to the umbrella company. The umbrella company will subsequently invoice the client on the contractor's behalf for the correct amount of hours worked.

Then, rather than being paid directly by the client, the contractor is instead put onto the umbrella company’s payroll. The client pays the umbrella company the correct amount, from which the umbrella company processes the pay through their payroll.

When the contractor's salary is processed through payroll, the great news is that the correct levels of tax and National Insurance are deducted. This means that umbrella company contractors are always up to date with their tax obligations and will not be faced with a hefty tax bill at the end of the year. Tax contributions are worked out through the pay-as-your-earn system, which is the most common way workers pay tax in the UK, meaning contributions are worked out and deducted based on how much you earn.

What else does an umbrella company offer contractors?

Every umbrella company will offer a basic level of services, including invoicing the client, processing the contractor’s pay through their payroll, paying the contractor and salary and providing them with a payslip breaking down their earnings.

What's more, every umbrella company will also cover contractors with statutory benefits. This is due to the fact that they are the contractor's employer, meaning they are obliged by law to protect the contractor with statutory sick pay, statutory holiday leave, maternity and paternity leave and a workplace pension.

As well as these basic services offered to the contractor, some umbrella companies will also offer additional benefits. This means if you have additional contracting needs and requirements, you can rest assured that you can find an umbrella company that can cater to your needs.

An example of the additional benefits that umbrella companies can provide include:

- Providing same-day payments to contractors

- Covering contractors with certain types of insurance. This is important for contractors that work in certain workplaces that require additional cover.

- Offering the option to purchase extra holiday leave

- Giving advice on things like pensions or childcare tax credits

What is an umbrella company?

What does the umbrella company get in return?

In exchange for the services offered, every umbrella company charges a fee. However, it's important to note that some umbrella fees will be higher than others.

As a general rule, contractors can expect to pay around £20+ per week on umbrella fees. The exact amount will depend on many factors, however, including the level of services the contractor requires.

For this reason, it’s important to ensure that you’re paying a fair price for your fees and aren’t paying over the market rate.

What are the alternatives?

As well as the umbrella company route, contractors can also take the PAYE option.

So how does this work? Rather than signing up to an umbrella company, the contractor will sign up with a PAYE agency.

Like an umbrella company, the contractor will be paid by the agency rather than the client, with the correct levels of tax and National Insurance deducted from their salary.

However, the contractor will not have the freedom to choose which clients they work with or which contracts they work on, a major drawback to many contractors who want freedom over their careers.

Another downside to this route is that the contractor will not receive continuity of employment. This makes things like getting credit, loans or mortgages difficult and is again considered a downside to the option by many.

The other option for contractors is to work through their own limited company. Here, the contractor will set up and run their own company, meaning they will be self-employed. This brings with it a number of responsibilities, including finding and securing your own contracts, general admin and paperwork that comes with running a business, dealing with all aspects of finance from invoicing to chasing payments, as well as filing a self-assessment and paying tax this way. Remember, being a company director comes with a range of responsibilities and shouldn't be taken lightly.

With self-assessment, contractors are also paid differently. Here, contractors will be paid their fees directly by the client and must put aside the correct levels of tax and National Insurance to pay their tax bill at the end of the year. Therefore, this option requires a lot of organisation and the ability to deal with all aspects of running a business.

Now you know the key differences between limited company, PAYE and umbrella company and understand exactly what an umbrella company looks like, you may have decided that this is the best route for you. If that’s the case, Umbrella Search is here to help.

Get started with Umbrella Search

If you'd like a helping hand finding an umbrella company that works for you, we're here to help.

After all, we take the hard work out of finding an umbrella company, doing all the work for you.

We work closely with contractors to understand their contracting needs and requirements before undertaking the thorough research and due diligence provided to give you a list of the best-suited umbrella companies for your needs.

Why not get in touch with our friendly team today to see how we can help you?



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