For thousands of contractors across the UK, an umbrella company offers a stress-free way of contracting.
However, taking the leap to an umbrella company can be daunting if have been contracting as a sole trader. What will working through an umbrella company entail? What can you expect from an umbrella company?
To help answer the questions and address the unknowns so the choice is a little more clear, Umbrella Search has put together this guide.
Setting up with an umbrella company
Contractors considering working with an umbrella company will want to know where to begin. Firstly, you can read our comprehensive guide on considerations to make before signing up to an umbrella company to make sure it’s the right move for you.
Once you’ve decided an umbrella company is the right way to go and done your research to find the perfect umbrella provider, you will begin the onboarding process.
Thankfully, setting up with an umbrella company couldn’t be easier. The umbrella company will provide the contractor with an employment contract. Once you have checked through this and made sure you’re happy with the terms, it’s time to sign it.
Next, you will need to provide a few key documents such as proof of ID, and fill out a new starter form and you are ready to go.
Getting paid
Now you have enrolled with the umbrella company, it’s time to get to work.
You will work on the contract as usual. However, unlike when you operate through a limited company, the way you are paid will be different.
When you operate through a limited company, you are responsible for invoicing the client directly, waiting for the payment to be made, often having to chase payments in the meantime, and then setting aside enough to pay your tax bill once you have been paid. This means you will have to file a self-assessment tax return each year, which can be time-consuming and means you must correctly set aside enough of your income to cover the amount.
Things are a little different with an umbrella company, making getting paid much easier.
You can simply submit your timesheet and any expenses to the umbrella company. The umbrella company will invoice the client on your behalf.
The umbrella company then pays the contractor, processing the income through their payroll. This means that the correct levels of income tax and National Insurance are deducted.
You will receive a payslip with all the details, such as how much you have paid in deductions.
This means that umbrella company contractors don’t need to worry about filing tricky tax returns, chasing late payments or saving up for their tax bills, as this is all taken care of for them.
Contractor insurance
As we have mentioned, using an umbrella company will not impact your day-to-day operations in the contract you are working on.
However, when you opt to use an umbrella company, you receive certain benefits that are legally required to work on the contract in the first place.
An umbrella company will cover the contractor with the insurance they need to carry out the contract at hand, such as professional indemnity insurance. This is one less thing for the contractor to worry about.
Support and assistance
Contractors will want to know that they are supported by the umbrella company they signed up with. The great news is that an umbrella company will offer help and support to the contractor, being there to answer their queries and questions when they need it.
Generally, when you sign up with an umbrella company, you will be given a dedicated account manager who will be your go-to contact and will help you with any issues relating to the contract, your pay, tax or statutory benefits.
The umbrella company will usually have a HR professional to help you with any issues related to employment, such as your pension contributions or any issues that arise during the contract.
This is a great source of help to contractors who may be new to contracting or nervous about signing up with an umbrella company, as you know, you will be supported.
Taking time off
Any contractor working through a limited company will know that taking time off can be difficult. After all, when you don’t work, you don’t earn money. However, we all know that time off is essential to ensure you are receiving enough relaxation and time to recharge.
When working through an umbrella company, however, you will receive statutory rights, including holiday pay. That means umbrella company contractors who take time off will still be paid. If you are a full-time contract this means you are eligible for 5.6 weeks of paid holiday leave per year. If you are a part-time contractor or work on different contracts with varying hours, holiday pay is worked out pro rata. Your umbrella company will help you calculate how much time off you will receive.
The umbrella company will also keep you updated on how much holiday leave you have left and be there to answer any questions about this.
Time to make the move to an umbrella company?
Now you know what you can expect when you work with an umbrella company, you will need to find an umbrella company that’s the right fit for you.
Umbrella Search is here to help contractors find an umbrella company that works for them.
We will get to know your priorities as a contractor to find an umbrella company that’s just right for you. To see how we can help, simply get in touch with the Umbrella Search today, and start your journey towards stress-free contracting.
Umbrella Search FAQ
1. What is an Umbrella Company?
An umbrella company is a payroll intermediary that employs contractors and freelancers, managing their tax, National Insurance (NI) contributions, and payroll administration. This allows contractors to work on assignments without having to set up their own limited company.
2. How Does an Umbrella Company Work?
When you work through an umbrella company, you become their employee. They invoice your end client or agency on your behalf, deduct the necessary taxes and fees, and then pay you your salary. This simplifies compliance and tax matters for contractors.
3. Who Uses an Umbrella Company?
Umbrella companies are typically used by:
Contractors who do not want to operate a limited company
Those working inside IR35 (off-payroll working rules)
Short-term contractors or freelancers who prefer an easy payroll solution
4. What Are the Benefits of Using an Umbrella Company?
Ease of Use – The company handles payroll, tax, and NI deductions
Legal Employment Status – You receive employment rights, such as holiday pay, statutory sick pay, and maternity/paternity leave
No IR35 Worries – Your tax is deducted at source, so IR35 compliance is not an issue
Continuous Employment – Even when moving between contracts, your employment remains consistent
Pension Contributions – Access to workplace pension schemes
5. What Deductions Will Be Taken from My Pay?
Your umbrella company will deduct the following from your gross pay:
Income Tax and National Insurance – PAYE tax and employee NI contributions
Umbrella Company Margin – A weekly or monthly fee for the service
Employer’s National Insurance Contribution – Paid before reaching your final take-home pay
Workplace Pension Contributions – If you are auto-enrolled, pension deductions will apply unless you opt out
Holiday Pay – Usually included in the rate or accrued separately
6. How Much Will I Take Home?
Take-home pay varies depending on your rate, tax bracket, and umbrella company margin. Typically, contractors using an umbrella company take home around 60-70% of their gross earnings after deductions.
7. Are All Umbrella Companies the Same?
No. While they provide similar services, differences exist in:
Fee structures (fixed weekly/monthly margin)
Additional benefits (such as insurance cover or rewards schemes)
Transparency in deductions
Customer service and responsiveness
8. How Do I Choose a Reputable Umbrella Company?
Look for an umbrella company that is:
Transparent about fees and deductions – Beware of hidden costs
Well-reviewed by contractors – Check independent reviews
9. Do I Still Need to File a Self-Assessment Tax Return?
If your only income is from the umbrella company, you usually don’t need to file a self-assessment tax return. However, if you have additional income (e.g., property rental, investments, or self-employed work), a tax return may be required.
10. Can an Umbrella Company Help Me with IR35?
Yes. Since an umbrella company deducts PAYE tax and NI at source, you do not need to worry about IR35 compliance. This makes it a popular option for contractors who are deemed inside IR35.
11. What Are the Risks of Using an Umbrella Company?
Non-Compliant Schemes – Some umbrella companies promote tax avoidance schemes; these should be avoided
Higher Taxation – PAYE tax may result in less take-home pay compared to operating a limited company
Lack of Flexibility – Unlike limited companies, you cannot claim as many expenses
12. How Do I Leave an Umbrella Company?
If you no longer need their services, you can resign by giving notice. Ensure any outstanding payments are settled and request a P45 for your records.
13. Is an Umbrella Company Right for Me?
An umbrella company is ideal if you want a hassle-free payroll solution with full employment rights. However, if you are a long-term contractor earning a high day rate, setting up a limited company may be a more tax-efficient option.
If you are unsure, it’s always best to seek advice from a tax professional or accountant.
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