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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 of operating through an umbrella company.
Given 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.
An umbrella company sits between a contractor (or any self-employed individual) and a client or recruitment agency. Umbrella companies employ contractors working on temporary engagements. The umbrella company then invoices 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 same way that limited company contractors issue invoices to clients, umbrella employees submit a timesheet, weekly or monthly, to the umbrella company. This timesheet provides details of hours worked, plus 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 several reasons, including:
On the flip side, 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?
This short video explains the difference between the two to help you make an informed decision.
For a more detailed comparison of these two options, take a look at our guide to limited vs umbrella.
Choice and flexibility are essential to contractors, many of whom work through an umbrella company on some assignments and through their limited company on others. This is why we offer a margin-free umbrella employment service included in a number of our accountancy packages, allowing you to seamlessly switch between the two as and when you want with ease.
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Appointing an accountant can save you time and stress when starting up on your own. If you would like to speak to someone about any of the above information or any other queries you may have, arrange a callback and a member of the team will be in touch.