A question you’ll often face as a contractor is how you intend to provide your service to clients. By this, we mean the vehicle through which you work. Your client or recruitment agency might ask if you want to contract through your own limited company or explore the alternative, which is to operate through an umbrella company.
Given there is some confusion about umbrella working, we thought it apt to explain what an umbrella company is, how it works and compare and contrast it with limited company contracting.
So what is an umbrella company? An umbrella company sits between a contractor (or any self-employed individual) and the client or recruitment agency. Umbrella companies employ contractors working on temporary engagements, invoice the client or agency on the contractor’s behalf before paying the contractor minus PAYE costs, such as Income Tax and National Insurance contributions. As a result, a contractor using an umbrella company becomes an employee of the umbrella for the period they work in this way.
Using an umbrella company is fairly straightforward. Here’s a quick breakdown of how contracting via an umbrella company works in practice.
Your umbrella company will sign a contract with your recruitment agency and in some cases, the end client directly if no agency is present in the labour supply chain. You’ll then sign an employment contract with the umbrella, becoming an employee of the company in the process.
In the same way that limited company contractors issue invoices to clients, umbrella employees submit a timesheet - whether weekly or monthly - to the umbrella, providing details of hours worked, along with any expenses to claim. The umbrella company then bills your agency or the end-client for this work on your behalf.
The umbrella company then pays you directly into your personal bank account for the time worked, minus the tax that you owe on this income. You’ll receive a payslip from the umbrella, which will detail all deductions - from Income Tax to National Insurance Contributions, the umbrella company margin, the apprenticeship levy and employers’ auto enrolment pension contributions.
Yes. As an employee engaged under a contract of employment, umbrella workers are granted typical employment rights, such as sick pay, paid maternity and paternity leave.
In addition to receiving employment rights, contractors choose to work this way for a number of reasons, including:
On the flipside, there are several other considerations for contractors thinking about umbrella working:
Is using an umbrella company the right way to go? Or does limited company contracting better suit what you’re looking for? In this short video we explain the difference between the two to help you make an informed decision.
Choice and flexibility are important to contractors, many of whom work through an umbrella company on some assignments and via their limited company on others. This is why SJD Accountancy recently launched a margin-free umbrella employment service included as part of a number of our accountancy packages. This allows you to seamlessly switch between the two as and when you want with ease. To learn more about what we offer, take a look at our accountancy packages.
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