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Beginner’s Guide to How Umbrella Companies Work

How Umbrella Companies Work

Taking your first steps into self-employment will always seem incredibly daunting. After all, stepping away from the traditional 9-to-5 will also see you kiss goodbye to a steady pay cheque, and many workers will inevitably struggle to cope with this additional financial responsibility.

By setting up as a limited company or sole trader, contractors will have to start managing their own accounts and expenses; ensuring that their business remains as profitable as possible while also staying in line with modern tax regulations. Although this will certainly provide you with greater control of your business, the confusing paperwork and legalities involved can quickly make this administrative burden seem all the heavier.

While some will inevitably hire a contractor accountant to lighten the load, other workers will go one step further and look to work under an umbrella company instead. But how exactly do these companies work and how can you tell if it’s the right working option for you?

What is an Umbrella Company?

When working under an umbrella company, you essentially become an employee of that company. These organisations will employ a number of freelancers and contractors, helping to manage your taxes, payroll and expenses, and ultimately allowing you to concentrate solely on doing your job.

Additionally, umbrella companies provide many of the benefits involved with regular employment, such as statutory sick and holiday pay, maternity leave and pensions. In short, umbrella employment is effectively a safe middle-ground for people that want to work for themselves but without most of the involved financial responsibilities.

However, although you’ll be treated as an employee of the umbrella, you’ll still be in charge of sourcing your own work, clients and income. Undoubtedly the most hassle-free form of self-employment, umbrella companies are often incredibly popular among new contractors or those working on shorter assignments.

How Will You Get Paid?

Umbrella companies will pay you just like a normal employee through the PAYE system. Instead of having to worry about filing Self-Assessment forms or keeping on top of tax deadlines, you just need to provide a timesheet which shows how many hours you’ve worked and how much each client owes you.

From there, the umbrella company will invoice the client and, once payment has been received, provide you with a normal payslip, with the most reputable companies offering same-day payments. Before they pay you, however, they’ll also calculate your tax and National Insurance contributions and deduct this from the final amount, along with any other monthly deductions that need to be made (your pension, for example).

This ultimately means you’re always paid exactly what you’re owed, without having to chase clients for payments or figure out your own tax deductions. With an umbrella company, getting paid has never been easier.

How Umbrella Companies Benefit

Sadly, this heightened level of convenience doesn’t come for free, and you won’t make as much money as you would through most other forms of self-employment. That’s because, when they deduct your National Insurance and tax contributions, they’ll also deduct their own fee (or margin) which will have been pre-agreed when you first signed up.

The size of this fee will obviously vary between different umbrella companies, but it’s most commonly charged as a fixed fee on a weekly or monthly basis, with the latter option usually working out a little cheaper. However, some companies will charge you an agreed percentage of your invoice instead, so you’ll need to look into which pricing structure will work our best for you.

Can You Claim Expenses?

In a word: yes. Just like every other form of self-employment, those working under an umbrella company are able to claim relief on travel, accommodation, equipment and other allowable expenses. However, changes to legislation in April 2016 significantly reduced the number of umbrella workers able to claim these expenses.

Since umbrella employees are effectively treated just like regular workers, HMRC deemed it unfair that they should be able to claim travel costs back, when full-time employees can’t. But circumstances will be different for each worker, so you’ll need to look into which expenses you could be eligible for. For example, travel costs can be reclaimed by workers travelling to and from a temporary workplace, but there are strict rules in place regarding what actually qualifies.

Every employee is different, and the current legislation can quickly seem incredibly confusing. Fortunately, the ease, convenience and reduced risk of working under an umbrella company is something that will always remain the same.  

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