How Umbrella Companies work?

How umbrella companies work in 10 simple steps:

Working through an Umbrella Company can seem confusing, so let’s take a look at how the process works from Umbrella Company, to recruitment agency or end client to contractor.

  • The umbrella company will sign a business-to-business contract with the recruitment agency
  • You will sign an employment contract with the umbrella company
  • The Client (who you will be on assignment with) signs the Agency timesheet, which will confirm to them the hours/days that you have worked
  • You will send the signed time sheet to the Agency and also complete an identical online timesheet for the umbrella company along with any chargeable expense claims if applicable
  • The Umbrella Company will raise an invoice to the Agency for the work you have done plus any expenses that the client has agreed to reimburse (ie chargeable expenses)
  • The Agency invoices the Client for work completed plus any chargeable expenses
  • The Client pays the Agency
  • The Agency pays the Umbrella Company; the date will be determined by the Agency’s payment schedule
  • The Umbrella Company processes the payment and any chargeable expenses and deducts the necessary tax and NI contributions. An Umbrella Company will make payment to you through PAYE (Pay As You Earn) and you should receive a payslip from them in the same way as you would in any other employment
  • You will receive your money less tax, NI contributions and the Umbrella services margin

Below is a flow chart which explains the steps that take place between an Umbrella Company, Recruitment Agency and End Client in order for you to get paid each week or month. Please bear in mind that for you to receive a regular income from your Umbrella Company, the steps below will need to be completed according to the Agency’s timesheet and invoicing schedule:

Umbrella Companies Flow Chart

How do Umbrella Companies Work?

An Umbrella Company will employ you under an overarching Contract of Employment and will be responsible for raising invoices for the work that you do whilst on assignment, this means that you will not have the worry of setting up and running a company or appointing an accountant.

It is worth noting that all Umbrella Companies are, effectively, controlled by the HMR&C. All payments must be made through PAYE. Therefore, the only difference in your take home pay should be the Umbrella Company's margin.

You should also be aware that, following the introduction of the AWR (Agency Worker Regulations), some umbrella companies are making unlawful deductions and not disclosing them until contracts have been signed. Therefore, you should ask for confirmation of all deductions, and the reason for the deduction, in writing before signing anything.

The claims and promises made by Umbrella Companies vary enormously; most of them will sound too good to be true... and they usually are!

  • The usual marketing ploys to watch out for
  • Higher net pay claims through un-receipted expenses (Finance Act 2016 removes the ability for an umbrella company to offer tax relief on expenses via salary sacrifice, find out more.)
  • Promises of protection from HMRC investigation
  • "HMRC approved"
  • Advertising a fee less higher rate tax relief.
  • Cheap starter fees, leading to normal, higher fees later on
  • "IR35 compliant"

Working through an umbrella company is one of the simplest options for a contractor, letting someone else take away the day-to-day paperwork, tax returns & general burdens of running a business.