How does an Umbrella Company Work?

(3 minutes to read)

An Umbrella Company is the first step many freelancers take into the world of contracting. It’s a different structure to permanent employment and with the new terminology, it can be confusing when you first start. This guide aims to demystify the workings of an Umbrella Company and explain it without the jargon!

How is an Umbrella Company structured?

An Umbrella Company acts as your employer. You sign an employment contract with the Umbrella and just like a permanent employer, they are responsible for:

  • Paying you
  • Paying all applicable taxes and deductions to HMRC
  • Administering your workplace pension
  • Statutory payments – such as sick pay and maternity pay
  • Covering you with appropriate insurance
  • Holiday pay
  • Declaring your earnings and tax figures to HMRC

As an employer, an Umbrella Company will also provide references, handle attachments of earnings and deal with your agency.

Some Umbrellas provide additional perks and benefits as part of the package. These can include childcare vouchers, rewards schemes, discounted foreign exchange and more.

What’s my relationship with the Umbrella Company?

As above, the Umbrella Company becomes your employer. The Umbrella signs a contract with your agency or end client – this means that you have no formal employment relationship with the agency/client you are working for.

The Umbrella Company remains your employer once your assignment is finished. This means you can take multiple assignments, even through different agencies and your employer remains the same. This is often beneficial for references and credit checks, as you are continuously employed.

How am I paid through an Umbrella Company?

Your Umbrella invoices the agency for work that you have done. Sometimes you will need to submit an additional timesheet to them – other agencies are ‘self-billing’, which means they will provide the information for your Umbrella Company to raise the invoices.

The agency will then pay the Umbrella Company on an agreed timescale. This tends to be within 7 days of invoicing (payment a week in arrears), but can vary depending on the agency and client – always check how long it will take to be paid.

Once the Umbrella receives money, they will pay you. As an employer, they are responsible for employer-side deductions – Employer’s National Insurance, the Apprenticeship Levy and pension contributions. The rate an agency pays to an Umbrella worker should be uplifted (compared to being paid directly by the agency) to account for these deductions.

Do you want £95 + VAT per month accountancy?

Yes I do

Once these are deducted, the Umbrella calculates your own personal tax and NI. You will be provided with a payslip showing these deductions. Any good Umbrella will also send you a document showing the employer-side deductions – beware of any that don’t.

What should I look for when choosing an Umbrella Company?

Not all Umbrella Companies are created equal and you will find standards vary across the market. A few things to look out for are:

Compliance. As an employer, Umbrellas should all calculate your pay in the same way. Be very wary of a company promising 80% take-home pay or more – they are likely to be a tax avoidance scheme. Look for professional accreditation and badges of compliance on the Umbrella’s website.

Service. An established Umbrella will have the staff necessary to look after their contractors. In the event of any queries with your pay, it’s no good signing up to a cheaper operator who take days to respond to emails or can’t be reached when you call them.

Transparency. It is vital that you know what is happening to your money. Any good Umbrella will provide you with a pay illustration before you sign up, and send you a complete breakdown of your pay. If they don’t, they might have something to hide!

This is only a brief guide to the key factors to look out for when choosing an Umbrella.

Our award-winning sister company, Contractor Umbrella, are one of the longest-running and most respected names in the industry. If you would like to know more, visit their website or give them a call on 01206 761 326.

If you think a Limited Company might be a more suitable option, have a look at our Limited or Umbrella guide, give one of our specialist contractor accountants a call on 01442 795 100 or email sophie.lewis@dolanaccountancy.com.

Why Dolan Accountancy?

Dolan Accountancy was set up by Simon J Dolan, the man behind the well-known brand SJD Accountancy. With over 25 years experience in the contracting marketing, Dolan Accountancy has the heritage, reputation and credibility you can trust. Working closely with our sister company, ContractorUmbrella, it means we can offer one low cost, fixed fee package at £95 + VAT per month. This gives you the flexibility of using both our Limited Company Accountancy Services and our award winning Umbrella Service, for one inclusive cost. We don’t believe in tiered packages or hidden extra fees, instead we aim to give you everything you need, including:

  • Free Company Formation – This is where it all begins. Once you have decided on an available name, we will form your company free of charge (if using our accountancy services) and it will be ready for you to use in as little as three hours.
  • Free use of ContractorUmbrella – With changes in Public Sector IR35 Legislation we understand that sometimes you are required to contract via an umbrella company. We will keep your limited company ticking over, while you work margin free via our sister company, ContractorUmbrella.
  • A Dedicated Accountant – Your accountant will be there for any company or personal tax advice that you require. We will never outsource work, even to internal teams.
  • Free Access to FreeAgent – The founder behind the multi award winning FreeAgent platform was one of Simon’s first clients, therefore it only seems fitting that we offer all of our clients access to FreeAgent, free of charge.
  • Free Business Banking – We have decided to waive our commission so our clients can use CashPlus free of charge for the first year, saving you £69.
  • Unlimited IR35 Status Reviews – We will review all of your contracts for IR35 purposes and provide you with our professional opinion as to its status.
  • Free Registered and Director’s Service Office Address – Sometimes you just don’t want your home address on display at Companies House. When you sign up to our accountancy services, we will offer the use of our address as an alternative.
  • Your Business and Personal Taxation Needs – This includes Company Accounts, Director’s Personal Tax Return, VAT Returns, Payroll, Corporation Tax and Dividend advice, to name just a few.

If you’d like to find out more about how Dolan Accountancy can help you and your business, please give us a call on 01442 795100 or email sophie.lewis@dolanaccountancy.com or jaime.thorpe@dolanaccountancy.com.

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