What is an Umbrella Company?

If you’re a freelancer or contractor that typically takes on temporary work, then the chances are you’ve heard of umbrella companies, but what are they?

More importantly, how do they work and are they worth it?

When it comes to comparing umbrella companies across the UK, the professional team at Umbrella Tracker can be trusted to help you weigh up your options and make the right decision for you.

To understand more about how umbrella companies work, why people use them, and whether they could be a good choice for you, we answer some of the most frequently asked questions about this type of business below.

What is an umbrella company?

An umbrella company is simply a business that employs workers on fixed-term contract assignments.

Before a recruitment agency can offer you a temporary role, it may ask you to be employed by one of its preferred umbrella companies. You may be able to choose your own.

As the employer, umbrella companies remove any direct link between a recruiter and the worker.

They process payments through their payroll, removing the administrative burden from other parties in the supply chain, and provide employment protection as well as access to statutory employment benefits

For a more comprehensive answer to the query ‘what are umbrella companies’, feel free to carry on reading or get in touch with the friendly team at Umbrella Tracker today!

What does an umbrella company do?

An umbrella company mainly handles the paying of a freelancer or contractor’s wages through Pay As You Earn (PAYE). This means it also takes care of deducting tax like national insurance from your income.

While the umbrella company employs you, a recruitment agency is often the party that finds the client offering you temporary work.

That temporary work placement is often on a short-term basis.

How does an umbrella company work?

Still wondering ‘how do umbrella companies work’?

As there are several parties involved in this process, it can be difficult – at least, initially – to understand the role each plays.

Fortunately, the team at Umbrella Tracker has more than 20 years of collective experience in the industry, so we understand the umbrella company marketplace.

The four key parties that may be involved in the chain include:

  • Client — business that requires temporary workers
  • Worker (freelancer or contractor) — individual looking for temporary work
  • Recruitment agency — finds temporary workers for clients
  • Umbrella company — acts as worker’s employer when taking on client’s temporary work

It’s important to note, however, there’s no direct relationship between the umbrella company and client unless the contractor is working directly for the end client and not using a recruitment agency.

Client requires temporary workers

Clients from all kinds of industries, including the healthcare, social work, and IT sectors, require temporary workers.

This may be due to an unexpected increase in workload (for example, due to full-time staff leaving the company or an uptick in sales), having a significant backlog of work that needs completing, or lacking cover for staff on maternity or sick leave.

These clients will reach out to recruitment agencies, discuss their needs, and agree a contract which can help them to find suitable temporary workers when they’re required.

Recruitment agency searches for workers

Once the recruitment agency (also known as employment agency) has an understanding of what their client is looking for from a temporary worker, they’ll contact suitable candidates from their existing contacts or advertise the role for jobseekers to help fill the vacancy.

Their advertisement should explain the length of the contract as well as the pay rate (and whether it’s weekly, daily, or hourly).

Worker becomes an umbrella company employee

In many cases, a recruitment agency will only offer a freelancer or contractor temporary work if they’re employed by an umbrella company.

For example, if the contract is described as being ‘inside IR35’, this means that earnings from the arrangement are subject to PAYE.

As a result, the recruitment agency may ask you to be employed through an umbrella company. It may have preferred umbrella companies it can recommend the worker use, or be happy for them to choose their own.

If the recruiter happy with a worker choosing their own umbrella company, then it’s well worth using an umbrella company comparison service like the one offered at Umbrella Tracker.

All the umbrella companies you compare using our service are approved and vetted for your peace of mind.

With a helping hand from our unbiased advisors, we can match you with the right umbrella company for you.

Worker begins working for the client

Once the worker has been employed by an umbrella company, the recruitment agency will be able to match them with the client’s requirements.

Why do people use umbrella companies?

Unsure why you should consider using an umbrella company over setting up your own limited company? The answer to this question is short and sweet – because it’s easier!

Working with an umbrella company is often a hassle-free option that allows you to have an employer on a contracted basis.

As a result, you don’t need to worry about tax returns, because your employer will handle this for you.

Individuals with their own limited company will need to ensure they keep detailed records of their business details in the form of invoices, bookkeeping, tax and VAT returns. Working with an umbrella company therefore ensures all your tax and national insurance obligations are being handled on your behalf without you having to raise any paperwork.

This can save you significant time and stress when it comes to administration, accurately filling out official forms, chasing invoices, and so much more.

Plus, you’ll be able to benefit from similar employment rights to permanent staff, such as sick pay, maternity or paternity pay, and statutory paid holidays. You’ll also be enrolled in a pension scheme.

Depending on the type of company you work for, you may also be provided with access to welfare services, and other more comprehensive benefits packages.

Is it smart to use an umbrella company?

As with most working arrangements, the answer to this question is highly dependent on both your personal and professional preferences.

To help you determine whether using an umbrella company is a smart solution to finding temporary work, we explain some of the benefits and areas to consider when using an umbrella company.

Benefits of umbrella companies

You can work for multiple agencies

With an umbrella company, you can work for multiple agencies, but still enjoy Continuity of Employment as the umbrella company will remain your employer throughout various assignments. This can give you more employment rights and help you with obtaining loans, such as securing a mortgage.

No unexpected tax bills

An umbrella company will deduct all the necessary PAYE and tax deductions for you, so you needn’t worry about all the time, administration, and stress that can come with filling out your own tax returns in the UK. Umbrella companies are therefore a hassle-free solution for many contractors and freelancers.

Entitled to employee benefits

As an employee of an umbrella company, you will be entitled to statutory benefits such as holiday and sick pay, as well as maternity, paternity, and adoption leave.

This is in contrast to the benefits that you’d receive as a limited company contractor, so you’ have to make arrangements if you were going on holiday or taking an extended leave of absence from your work.

Areas to consider

Umbrella companies charge a fee

To use an umbrella company, you will be charged a fee (which is typically between £10-£30 a week). It’s therefore worth bearing this in mind when exploring umbrella companies.

However, opting for an umbrella company that’s transparent about its pricing and doesn’t charge hidden extras or exit fees can help you to keep these additional costs down.

Similarly, the umbrella company comparison service provided at Umbrella Tracker is completely free to access, so you needn’t worry about any extra costs at this stage of the process.

More tax-efficient solutions might exist

Depending on how you work, you might find that setting up your own limited company, instead of using an umbrella company, is more tax efficient for you.

This is because your entire salary is taxed via PAYE when you use an umbrella company and no expenses can be offset against what you earn, while limited companies can benefit from a variety of potential tax advantages.

It’s worth bearing in mind, however, that limited companies come with their own burdens, too.

Not regulated by the government

It’s important to bear in mind, however, that umbrella companies are not regulated.

At Umbrella Tracker, we use our experience and know-how to research the background of umbrella companies on our approved supplier list, conducting due diligence that encourages peace of mind for you.

As a result, the payroll providers we recommend include accredited umbrella companies, sector-specific umbrella companies and umbrella companies with UK call centres – all of which contributes to ensuring their service levels match ours and, more importantly, meet your expectations.

For help determining whether working with an umbrella company is the right route for you, please feel free to get in touch with our down-to-earth team today.

How do umbrella companies make money?

Umbrella companies make their money by deducting a fee from the employees’ gross pay.

Not only does this fee help them to cover insurance, administration and staff costs, but it also passes on tax savings to the employees.

Do umbrella companies pay your tax?

Yes, umbrella companies run PAYE payrolls that removes the need for you to speak with the tax man regarding your contract earnings. This is because the umbrella company is technically the individual’s employer, even though they’re completing work for a third-party client either directly or via a recruitment agency.

As a result, the umbrella company covers your employee obligations and will therefore pay your salary while deducting the necessary tax and national insurance as dictated by the PAYE system.

How much do you have to pay an umbrella company?

The fees for an umbrella company can cost as little as £10 per week, but can go up to £30.

It’s therefore well worth exploring your options using a comparison service like the one provided at Umbrella Tracker to ensure you’re not being overcharged by your chosen umbrella company.

Not to mention, when you use Umbrella Tracker to weigh up your options, you can rest assured that all the umbrella companies we vet are fully transparent about their prices. This means no hidden extras costs and no exit fees.

Contact Umbrella Tracker today

Searching for a payroll solution that works for you?

At Umbrella Tracker, we can help you to take back control of your payroll by helping you to compare thousands of fully vetted umbrella companies in the UK.

Regardless of whether you work in the healthcare, medical, social care, or IT industry, we understand the importance of doing your research before you commit to an umbrella company.

This is why we offer temporary workers across the UK free, personalised umbrella company comparisons and unbiased advice, helping you to find the most suitable umbrella company to meet your specific requirements.

Plus, you can rest assured that the umbrella companies we match you with have been fully vetted using our comprehensive assessment process which includes our own research, current client testimonials, and Preferred Supplier Lists (PSLs) from recruitment companies.

Our list of umbrella companies is also constantly monitored to ensure you only work with the most reliable, professional, and reliable businesses.

To find out more about how umbrella companies work, the service we provide, or for a free comparison please don’t hesitate to contact our friendly and knowledgeable team of advisors today.

Alternatively, you can always discuss your options over the phone by simply giving us a call on 0203 026 3303!

However you decide to get in touch, we look forward to learning more about your temporary working requirements and how we can help.

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