Umbrella Companies Explained
Umbrella companies are an increasingly popular choice for contractors and freelancers – whether they have been offering their services for years or are working in a new way due to the Covid-19 pandemic. They offer a flexible but reliable form of work which minimises unnecessary financial admin and provide a level of stability akin to regular employment. Contractors working for umbrella companies are able to choose how and when they work, without sacrificing the benefits of working for a single organisation.
In addition, umbrella companies provide a way for contractors to work without falling foul of the off-payroll working rules that prevent the use of personal service companies (PSCs). These have been in place across the public sector in 2017, and with the same restrictions set to be imposed across the private sector as of April 2021, many umbrella companies are expecting to see an increase in demand over the coming months.
What are Umbrella Companies?
An umbrella company acts as an employer for contractors and freelancers who are working on fixed-term contracts, usually of up to three months. It is an intermediary between the contractor and the client to whom they are providing their services – charging the client on the contractor’s behalf, deducting National Insurance contributions and tax at source and paying the contractor directly, just as if they were a PAYE employee. This means that the contractor does not have to process their own invoices or taxes, or pay the costs involved in working through their own limited company. It simplifies the entire process and ensures that payments are made in a timely, efficient and accurate manner. The umbrella company takes a monthly or weekly fee for the services that it provides, which is deducted alongside tax and NI.
In effect, an umbrella company acts as an external payroll department for the company receiving the contracted services. Most umbrella companies work via the following system:
- You register with the umbrella company. You will need to complete a registration form, provide valid proof of ID and in some cases supply a P45 from your previous employer. In effect, the umbrella company is now your employer, regardless of which company or companies you are working for as a contractor.
- You submit weekly timesheets to the umbrella company. These allow the umbrella company to calculate how much to charge the end client for the services you have provided, as well as calculating what service charge to deduct from your salary.
- The umbrella company invoices the client. Depending on the agreed terms, payment may take a number of weeks but you will be notified immediately when it has been received.
- Your salary is paid into your bank account. The umbrella company deducts NI contributions and tax at source, which means that the IR35 rules do not apply.